The Federal Reserve arguably saved the US from a recession in 2024: Fed chair Jerome Powell calibrated interest rates to gradually bring down inflation without triggering an acute slowdown in economic growth.
But President Donald Trump isn’t satisfied with Powell’s performance, though. On Thursday, a day after the Fed decided against lowering interest rates, Trump called Powell a “FOOL, who doesn’t have a clue” on his social platform, Truth Social.
Trump wants to lower interest rates because he thinks that high rates are no longer needed to check rising prices. Inflation has come down to under 3 percent, but it threatens to increase again due to tariffs.
But Powell has full license to ignore what Trump thinks. The Fed and the president are supposed to act independently so that the country’s macroeconomic policy can be insulated from political concerns.
That’s why past presidents have largely — thought not always — steered clear of commenting on the Fed’s decisions, even when they have had political incentives to do so.
Former President Joe Biden was reluctant to publicly criticize the Fed and repeatedly emphasized its independence, deferring to its judgment on interest rates during a period of high inflation following the Covid-19 pandemic.
But Trump’s most recent attack on Powell was just the latest in a long string of his attempts to influence the central bank. Trump has recently dubbed Powell, whom he appointed in 2017, a “major loser” who was “too late and wrong” on inflation. He’s previously called the Fed itself “crazy,” “loco,” and “a bigger problem than China.” And he has repeatedly sought to dictate Fed policy: “It is a perfect time to lower interest rates,” he said last month.
However, independent central banks have a far better track record than those governed by political interests. Politicians have an incentive to boost short-term prosperity, even at the expense of a country’s long-term economic prospects, because they are beholden to voters in regular elections. Independent central bankers, on the other hand, can afford to take a longer view.
That approach reflects the understanding that “A mark of a successful country in the modern era has been an independent central bank,” as Goldman Sachs Group Inc. Vice Chairman Rob Kaplan said in an address last month.
The Fed has faced political headwinds before. But the degree to which this administration is seeking to meddle in Fed policy is unprecedented and could potentially exacerbate already heightened economic uncertainty stemming from Trump’s tariffs.
Past presidents haven’t so openly challenged the Fed
Past presidents have disagreed with the Fed in a few notable incidents — but they haven’t vocalized their concerns as publicly and brazenly as Trump.
Former President Richard Nixon joked that while he respected the independence of the Fed, he hoped that then-Fed chair Arthur Burns would “conclude that my views are the ones that should be followed” and bring down interest rates during the early 1970s.
Some historians theorize that Nixon exerted more explicit pressure on Burns in private and that the Fed chair ultimately caved to that pressure, allowing inflation to get out of control. But if Nixon did, he never spoke about it publicly.
In the early 1980s, former Fed chair Paul Volcker aggressively raised interest rates to temper the inflation crisis that Burns started, triggering a recession. Former President Ronald Reagan never publicly criticized the Fed during that time, but made his agenda known behind closed doors.
Volcker recalled in his memoir that, in 1984, he was called into a private meeting with Reagan in which the president ordered him not to raise interest rates before the November election. Volcker, “stunned,” writes that he walked out without saying a word, and that was the last he heard of it.
For the most part, however, both Republican and Democratic presidents, from George W. Bush to Barack Obama, have respected the independence of the Fed and declined to comment on its monetary policies.
”One of the hallmarks of our economic strategy has been a respect for the independence and the integrity of the Federal Reserve,” former President Bill Clinton said in 2000.
Trust in the Fed depends on its operational independence
Technically, the Fed isn’t completely independent. The authority of the Fed stems from Congress’s 1937 Federal Reserve Act, which lawmakers have tweaked over time. The president also nominates the Fed’s Board of Governors, whom the Senate confirms.
But there is good reason for Congress and the president to keep the Fed at arm’s length.
The stability of the US financial system rests on the perception that the Fed and its Board of Governors, with their vast economic expertise, control the levers of monetary policy and do not answer to short-term political interests. This allows the Fed to focus on the country’s long-term economic welfare — which might sometimes require raising interest rates to cool inflation — rather than the more instant economic relief that politicians might demand.
Research has shown that central bank independence corresponds with a long-term reduction in annual inflation, even in advanced economies.
That’s good for American consumers, businesses, and foreign investment.
Attacks on central bank independence, on the other hand, can lead to what former Fed chair Ben Bernanke described in a 2010 speech as “undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.”
There are many examples of countries that suffered economically after their central banks were co-opted by political interests.
Take Venezuela, where the country’s authoritarian leaders, Hugo Chávez and Nicolás Maduro, ended the independence of the country’s central bank and ordered it to print more money to finance government deficits during the 2000s and early 2010s. What followed was a period of hyperinflation, where prices rose by double-digit percentage points per month. As their economic prospects dried up, nearly 8 million Venezuelans fled the country in search of opportunities elsewhere.
Turkey also plunged into an economic crisis in 2022 after President Recep Tayyip Erdoğan exercised greater control over the central bank and pressured it to keep interest rates low. As a result, inflation reached a 20-year high, hitting 61 percent in April 2022. The Turkish Lira collapsed in value, and the country was forced to implement capital controls — restrictions on the movement of money in and out of the country — to prevent it from falling further.
The US does not have to go the way of Venezuela and Turkey.
The Fed is set up to respond to a moment like the present: Trump’s tariffs threaten to drive up inflation, and the Fed has the power to raise interest rates or maintain them at their current level to mitigate inflation. But if Trump were in charge, he’s made clear that he would cut interest rates, which could drive up prices even higher in the long run.
Trump seems to have changed his mind about trying to fire Powell for now. But if his attacks on the Fed continue, it might only deepen the struggle of Americans who were already grappling with an affordability crisis.
The post How Trump’s attacks on the Fed could sabotage the US economy appeared first on Vox.
