Trump threatens Federal Reserve independence – “only low rate people”

There are ten months left in Jerome Powell’s term. While President Trump formally cannot remove him from office without a specific reason, his actions clearly indicate his desire to replace him with someone loyal to White House policy. Such a move could undermine confidence in the independence of one of the world’s most important economic institutions for years – with consequences that reach far beyond the borders of the United States.

Key information:

• If there is no premature dismissal of Jerome Powell, the Fed will change its head in as little as 10 months.
• Donald Trump is likely to want to replace Powell with someone loyal to his economic policies.
• Such a move threatens to undermine the Federal Reserve’s independence, which could have serious consequences for the global economy.

Trump doesn’t accept an independent Fed and wants “only low rate people”

Officially, Donald Trump said Wednesday that he does not intend to remove Powell from office before the end of his term. He stipulated, however, that he could make an exception in the case of “fraud” – and he could consider the costly renovation of Fed headquarters, valued at $2.5 billion, as such a pretext. Trump declared that the central bank chief’s handling of the project “in a way” warranted dismissal. He also accused the central bank chief of a lack of candor during June testimony before Congress on the issue.

However, it is no secret that the reasons for Trump’s dislike of the Fed chief (whom he himself appointed during his previous term) go much deeper. The president has repeatedly stressed that he does not tolerate monetary policies that do not match his vision. On social media, he directed insults and accusations of “loss of billions of dollars” toward Powell, which the person concerned himself did not comment on. On Wednesday, he openly stated that when it comes to the Fed, “he’s only interested in the low rate people.”

A fan of the president’s economic views, former Fed Chair Janet Yellen was no longer in 2019, saying:

I doubt that he [Trump] would be able to say at all that the Fed’s goal is maximum employment and price stability – which are the goals that Congress has given the Fed.
It is hardly surprising to see such a stance, since many of Trump’s public statements about the economy suggest that he does not fully understand its mechanisms and does not respect the Fed’s independence from government.

In this respect, moreover, he is dangerously reminiscent of Turkish President Recep Tayyip Erdogan, who, claiming that high interest rates drive prices up, kept them low leading to inflation that reached 85% at its peak.

Could the next Fed chief be dependent on the White House?

Although Trump has denied any intention of firing Powell before the end of his term, that term ends in ten months. Wall Street is anxiously on the lookout for a new candidate to head the Fed, fearing that the institution could lose its independence during Trump’s second term.

Among Powell’s potential successors are Kevin Hassett (former director of the National Economic Council), former Fed board member Kevin Warsh, current Fed Governor Christopher Waller and former Treasury Secretary Scott Bessent.

The common denominator among these candidates is support for a more benign monetary policy. According to Jonathan Hilsenrath of the consulting firm StoneX, each of these candidates will have, so to speak, an “unwritten obligation” to carry out Trump’s will – that is, to pursue radical interest rate cuts.

Hassett, who has risen to prominence due to his close relationship with the president, is currently in the spotlight. Although he professes a commitment to the Fed’s independence, at the same time he insists that the current level of interest rates is too high and raises “legitimate questions” about whether it is the Fed members themselves who are undermining its independence.

In contrast, Kevin Warsh, another potential candidate, reminds us that history shows that independence in the conduct of monetary policy is fundamental to the central bank’s effectiveness – although he cautions that this does not apply to every sphere of Fed activity.

The current situation is reminiscent of historical instances of White House interference in Federal Reserve operations, one of the most glaring being Richard Nixon’s pressure on Arthur Burns before the 1972 election. At the time, the Nixon administration shaped media coverage to undermine Burns’ authority as central bank chairman.

“The Fed’s independence is a myth”.

There is no shortage of voices that claim that the Fed’s independence is merely an illusion.

As JPMorgan Chase analyst Ilan Benhamou noted, what is playing out in the public eye today was previously happening behind closed doors. In his view, the myth of Fed independence is cracking under the weight of political expectations.

Many Wall Street leaders, however, have made no secret of their concerns about the White House’s influence going too far. The heads of the largest banks – Jamie Dimon of JPMorgan or Brian Moynihan of Bank of America – urge that the Fed’s independence, which they say underpins confidence in US markets and guarantees global stability, not be compromised. “Manipulating Fed policy can be counterproductive,” they said. – Dimon warned, stressing that central bank independence is an “absolute necessity.”