What happens when there’s a hostile takeover of the central bank?
Until Donald Trump, no president had ever opened a criminal investigation into a chairman of the Federal Reserve. Since he took office for the second time, President Trump has terminated swaths of federal employees and politicized numerous formerly apolitical offices. However, his most unprecedented move has been his pressure campaign against the Federal Reserve and its leader, Jerome Powell to lower interest rates. He has repeatedly called for Powell’s firing and made broad claims about the White House’s influence over monetary policy. This conflict fight recently took an ugly turn when the U.S. Attorney’s office issued Powell two criminal subpoenas, putting Fed independence in grave danger. Considering that the Fed is intended to independently dictate American monetary policy and both Democratic and Republican leaders have criticized Trump’s attempts to encroach on Fed territory, Trump’s rhetoric and subsequent criminal investigation of the Fed and its leadership are completely unprecedented.
Since 1942, the Federal Reserve has been charged with the task of setting interest rates without outside influence. By lowering interest rates, more Americans can afford to take out loans. However, overborrowing can lead to defaulting on a large scale, as many borrowers gain access to loans that their credit wouldn’t have normally allowed them to and subsequently fail to pay them back. In the case of the 2008 financial crisis, for example, while many issues were to blame, mass-defaulting from low interest rates was a key reason behind the recession. Despite the potentially negative consequences of low interest rates, elected officials—especially presidents—tend to advocate for them given their short-term political benefits. When more Americans can afford loans, they associate their newfound borrowing power and the nation’s short-term economic progress with the current administration’s success. Hence, current political leaders may receive more votes at the next election.
Because of this political phenomena, Congress established the Federal Reserve as an independent agency that doesn’t serve directly under the president. The Fed’s Board of Governors, who oversee policy decisions, are appointed by the president and confirmed by the Senate for 14-year terms. One member of the Board will then serve as chair for a four-year term with potential to be reappointed by the president. However, the Fed’s chairman and its governors do not serve the president’s agenda; they cannot be fired by the president without clear reasoning. This design allows the Fed to make longer-term decisions about the American economy without considering election cycles.
With this in mind, Trump’s anger towards the Fed and its leadership stems from his campaign promises to improve the economy. During his presidential campaign, President Trump promised to “end inflation,” bring down prices dramatically, and halve energy and housing costs under his larger goal to “make America affordable again.” However, in order to implement these promises, he needs Powell to lower interest rates, which Powell has resisted, believing it would cause irreparable damage to the economy. Trump has also attempted to fire other Fed members opposing a rate cut, including Fed Governor Lisa Cook.
The latest criminal investigation surrounds the ongoing renovation of the Fed building in D.C., a standard practice that occurs routinely for different federal agency buildings. The Trump administration claims that cost overruns in the project are due to Mr. Powell’s alleged criminal activity. These allegations have received bipartisan pushback from many officials. Powell himself suggested that the investigation was merely another form of the administration’s efforts to persuade the Federal Reserve to lower interest rates.
The Department of Justice’s investigation into Jerome Powell will likely result in very few legal implications for the Fed chairman. Similar to President Trump’s other politically motivated criminal cases against former Federal Bureau of Investigation Director James Comey and New York Attorney General Letitia James, justice tends to prevail, as America’s judiciary is still based on law and not politics. However, these threats from President Trump constitute a major threat to the Fed’s independence. Fed governors’ terms are explicitly designed to minimize political influence and to ensure monetary decisions are made for the people, not votes.
The Federal Reserve’s job is a balancing act that requires autonomy from short-term political interests. America’s economy takes time to undergo the effects of government policy and, thus, should not undergo constant and rapid change. The risks of caving to Trump’s demands and making such short-term decisions are massive. Those in power today will be satisfied when more people take out loans and make purchases with their newly borrowed money. Tomorrow, though, when those individuals cannot pay back their debt, everyone will suffer.
