The US Federal Reserve is separated from government so it can set interest rates free from political pressure. The idea is to insulate US monetary policy from the short-term political interests of governments.
US president Donald Trump has for the past year attempted to pierce that political cordon.
His repeated attacks on Fed chief Jerome Powell – threatening to have him fired, calling a “loser” and “a numbskull” – are not just attempts to undermine Powell but also the Fed’s independence.
Trump wants interest rates to drop quicker. Powell remains worried about the potential impact of the president’s trade polices on prices. Powell maintains that inflation is still elevated because of tariffs.
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Either way, Trump’s latest attack or at least the Department of Justice’s move to open a criminal investigation into Powell over a $2.5 billion renovation of the central bank’s headquarters, which most see as spurious, represents a serious and dangerous escalation in this standoff.
It gave US stock markets pause for thought and a slide in the value of the dollar yesterday, while drawing the ire of former Fed chiefs.
Ex-Fed chairmen Alan Greenspan, Ben Bernanke and Janet Yellen described the inquiry as an “unprecedented attempt to use prosecutorial attacks to undermine” the bank’s independence.
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In a statement, co-signed by 13 former senior officials, they claimed this type of move could have “negative consequences” for the economy and cost of living.
“This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly,” they claim.
Powell said concerns about the Fed’s renovation project were “pretexts” to undermine the bank’s independence in setting interest rates and that he would not bow to Trump.
His term as chairman ends in May and the latest attack may reflect White House concerns that Powell could choose to remain on the Fed’s board until his separate term as governor ends in 2028.
