The Price of Pressure
There is a long history of US presidents leaning on the Federal Reserve, usually with the intention of pressuring it to lower interest rates so as to goose economic growth into election years. Nixon pressured then Chairman Arthur Burns by leaking false rumors about him to the press in 1971 and Lyndon Johnson is said to have physically shoved Fed Chair William Martin up against a wall during one particularly heated exchange. In that sense, President Trump’s pressure campaign against Fed Chair Jerome Powell is well within the bounds of political norms.
Still, like much else in President Trump’s second term, today’s pressure campaign has uniquely Trumpian qualities. It is overtly public for one thing; using the media as a conduit for threats -sometimes quickly rolled back and often conveyed with an air of “just thinking out loud here.” As a tactic, it seems designed to both intimidate and exhaust.
So far, the bulwark of Fed Independence has held. Powell has been steadfast in his public statements while carefully avoiding responding to the antagonism. Interest rates have remained elevated in deference to the perceived threat of inflation, even though this threatens the president’s agenda to turbo-charge the economy and bring down borrowing costs.
There is a very good argument that the Fed should be cutting rates faster than they are. Central banks are notorious for pivoting too late. Anyone remember “inflation is transitory” in 2021? But whether the Fed is ahead or behind the curve is beside the point.
The crucial thing for interest rate setting is that it is objective, evidence-based and free from political interference. You don’t need to think deeply to understand why. Politicians have conflicts of interest. The public insists on crediting them for short-term booms and busts alike. Electoral imperatives push them to goose the economy, even when it could cause long term harm. This takes the form of persistent deficit spending in the fiscal realm – and look where that’s gotten us! The debt to GDP ratio is approaching levels that threaten the foundations of American prosperity. Do we really want to give power over interest rates to politicians as well? We don’t have to guess what might result.
Central banks without a degree of independence are notorious for their association with hyper-inflation: Turkey, Venezuela, Argentina, Brazil, Zimbabwe. Many of these countries fall into the category of banana republics. Darkly, in many cases this subversion of central bank independence coincided with a drift towards authoritarianism. Even if we rule out those analogues, the persistent attacks on the Fed risk introducing a risk-premium on US assets. It’s possible we are already seeing this contribute to the weaker US Dollar in the first half of 2025 and the unusual volatility experienced by the treasury market.
Still, there are reasons to be hopeful. While the Fed’s independence is far from iron-clad, there are many hurdles that would need to be overcome to make it into a lapdog of the Executive Branch, and Congress (if it finds its spine) could easily push back. Even if the president appoints a crony to replace Powell, that appointee may soon find an independent voice on account of the protections the job carries with it, much as Supreme Court appointees often ignore the preferences of the presidents that nominate them once on the bench.
While the president’s pressure campaign has so far amounted to little more than sustained harassment, there are risks it could go further. Anyone who participates in the economy or markets (that’s all of us) should be alarmed. The risk of a crisis is remote, but the Fed’s independence is not a luxury. It’s a firewall against excess. In an age of government profligacy, we need that more than ever.