Fed Chair Jerome Powell

Central Banking quoted me in Economists Denounce Trump’s ‘Bullying’ of Fed Chair (sign up required). It opens,

Economists have attacked what they regard as US president Donald Trump’s bullying of Federal Reserve chair Jerome Powell, describing it as dangerous for the central bank’s continued independence.

On June 30, Trump posted on his social media platform a copy of a handwritten letter to Powell showing interest rates around the world. In the letter, Trump had written: “Jerome, you are as usual, too late. You have cost the USA a fortune, and continue to do so. You should lower the rate by a lot. Hundreds of billions of dollars being lost. No inflation.”

Along with the note, Trump posted that “Jerome ‘Too Late’ Powell, and his entire Board, should be ashamed of themselves for allowing this to happen to the United States. They have one of the easiest, yet most prestigious, jobs in America, and they have FAILED — And continue to do so”.

He added: “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost. The Board just sits there and watches, so they are equally to blame. We should be paying 1% Interest, or better!”

On July 1, Powell said the Fed would probably have lowered rates already had it not been for the tariffs and trade policies introduced by the Trump administration.

Ralf Fendel, professor of economics at WHU – Otto Beisheim School of Management in Germany, says Trump’s note bears all the hallmarks of political interference.

“Handwritten personal correspondence is traditionally reserved for heartfelt gratitude or strategic diplomacy, but not for exerting pressure on an independent central bank,” he tells Central Banking. “In resisting such pressure, Mr Powell is upholding the Fed’s institutional credibility and responding appropriately to a macroeconomic environment clouded by trade policy uncertainty and various economic risks.”

Fendel adds that Fed decisions must be guided by economic data and not the demands of the White House.

William English – professor of economics at Yale University, and a former director of the Fed’s monetary affairs division and secretary to the Federal Open Market Committee (FOMC) – says that having a president who is so publicly critical makes the Fed’s job more complicated. “But they have their mandate and will do their best to achieve that,” he says. “We’ll see how it goes!”

Francesco Bianchi, professor of economics and department chair at Johns Hopkins University, says the most recent remarks by Trump represent a turn for the worse.

“Such a confrontational stance cannot be good for central bank independence,” he says. “Powell probably feels that he needs to push back against the pressure and that he has a bit more freedom given that his second term is coming to an end.”

Fed historian Robert Hetzel adds that Trump appears to want to return to a time when the central bank was subservient to the US Treasury.

David Reiss, professor of law at Cornell University, says there is an extensive history of presidents “jawboning” the Fed chair to lower rates. However, he says central banks work better when “insulated from the political exigencies of political leaders”.

“Paradoxically, bullying the central bank can lead to interest rates increasing, as markets demand a higher risk premium as trust in the central bank’s decision-making decreases,” he says. He also concurs with Powell’s assessment that tariffs are inflationary through many channels.