Introduction to the Conflict
The White House’s latest criticism of Fed Chair Jerome Powell, over building renovations, marks a broader push by President Trump to exert pressure on the independent central bank. In response to this criticism, Federal Reserve Bank of St. Louis president Alberto Musalem defended the institution’s autonomy, citing global evidence that independent central banks deliver stronger inflation and employment outcomes.
The White House’s Criticism
The president’s top budget advisor, Russell Vought, revealed that he wrote to the Federal Reserve boss saying the president is “extremely troubled” by the Fed’s office building renovations, claiming Powell is “grossly mismanaging” the institution. The letter blasting the “ostentatious overhaul” comes as an escalation—or a change in tack—in the White House’s ongoing battle with the Federal Open Market Committee and more specifically, its leader. The criticism is not just about the renovation costs, which are reportedly $700 million over budget, but also about the leadership of the Fed.
The Federal Reserve Act
Despite a push from Trump 2.0 for efficiency, Vought’s questioning is, to some extent, at odds with the Federal Reserve Act, which gives authority to the Fed to maintain or change its buildings when it deems necessary. The Act reads: “The Board of Governors of the Federal Reserve System shall have power to levy semiannually upon the Federal Reserve banks, in proportion to their capital stock and surplus, an assessment sufficient to pay its estimated expenses … Its judgment alone shall be necessary for the purpose of providing suitable and adequate quarters for the performance of its functions."
Trump’s History with the Fed
Even before President Trump won the presidential election, he was hinting that he wanted more of a say in how the federally mandated independent Fed is run—and criticism of Powell has ramped up since then. Prior to the election, Trump called Powell “political” and said a rate cut would prove the FOMC was attempting to aid the Biden administration. Since winning the election, Trump has continually lobbied for cuts to the extent of threatening to fire Powell—which he legally is unable to do—and in turn sent shock waves through the market.
The Importance of Fed Independence
The importance of Fed independence was reiterated by Alberto Musalem, president and CEO of the Federal Reserve Bank of St. Louis. Musalem explained that countries that have had more independent central banks have delivered better inflation and better employment outcomes for the people they serve, meaning lower and more stable inflation and higher and more stable employment. He added that empirical evidence shows that independent central banks are able to control inflation expectations and keep them anchored better, and if they can keep inflation expectations anchored better, that means they can be more responsive to employment and activity when there are shocks to the economy.
Examples of Political Intervention
Examples of political intervention into the Fed have worked out poorly in the past—take Richard Nixon’s relationship with Fed Chair Arthur Burns. Burns has been dubbed by many as the worst leader in the Fed’s history, having presided over a period of stagflation—high inflation and low growth—in the 1970s. According to some historians, part of this resulted from his failure to stand up to the Oval Office.
Trump’s Goal for the Fed
Despite having nominated Powell for Fed chair himself, President Trump is making little secret of the fact he wants to see a more dovish person in the role. Indeed, late last month, he told reporters he was “going to put somebody that wants to cut rates.” President Musalem maintained the need for a board that was accountable and transparent to the public, saying: “We at the Fed have instrumental and operational independence, but the goals of maximum employment and price stability are set by Congress, and there’s accountability to Congress.”
Conclusion
In conclusion, the White House’s criticism of Fed Chair Jerome Powell is not just about the building renovations, but about the leadership of the Fed and the importance of its independence. The Federal Reserve Act gives the Fed the authority to maintain or change its buildings, and the importance of Fed independence is clear: to achieve the Fed’s dual mandate of inflation at 2% and maximum employment, the interest rate level should be set by independent economists working for the long-term benefit of the American public. The empirical evidence shows that independent central banks deliver better inflation and employment outcomes, and the Fed should remain independent to achieve its goals.
