“The credibility of the
Federal Reserve, its commitment to maintaining price stability, and its ability
to stand up against partisan political pressures are critical. Independence
can’t just be a slogan. Nor does the language of the Federal Reserve Act itself
assure protection.”—Economist and former Federal Reserve Board chair Paul
Volcker (1927-2019), “The Fed and Big Banking at the Crossroads,” The New
York Review of Books, Aug. 15, 2013
Before he died six years
after writing the above, many of the fears of Paul Volcker (pictured) about the Fed’s loss of
independence were being borne out. As Donald Trump rained down insults on his
own appointee to head the financial institution, Jerome Powell, Volcker
warned in even starker terms about the consequences of these threats:
“Not since just after the
second world war have we seen a president so openly seek to dictate policy to
the Fed,” Volcker and Christine Harper wrote in Keeping At It: The Quest for Sound Money and Good Government. “That is a matter of great concern, given that the
central bank is one of our key governmental institutions, carefully designed to
be free of purely partisan attacks.”
Volcker also placed this
within the larger context of “nihilistic forces” that not only aim to roll back
environmental regulations, but also “to discredit the pillars of our democracy:
voting rights and fair elections, the rule of law, the free press, the
separation of powers, the belief in science, and the concept of truth itself.”
Any resemblance to the
Presidential administration at that time was anything but coincidental.
Today, another half-dozen
years after what amounted to Volcker’s valedictory, everything he
tried to alert Americans about has come closer to reality.
Not content to badger an
inflation-conscious Powell into lowering interest rates, Trump now seems bent
on forcing him out before the Fed chair’s term expires next year—even to the
point of surprising members of Congress, meeting him on an unrelated matter, by
waving before them a draft letter firing him.
Since by law the Fed
chair can only be removed “for cause”—i.e., malfeasance—Trump’s Cabinet and
Capitol Hill stooges are braying for an investigation of what they regard as
inordinate renovation expenses at its headquarters.
I would call the evidence
for this “paper thin,” except that it doesn’t even deserve this phrase. How
this renovation is more egregious than questionable outlaws at other buildings—including Pete Hegseth’s space next to the Defense Department’s press briefing room, modified into a make-up studio—goes unexplained.
In May, the Supreme
Court, in a ruling that temporarily allowed Trump to terminate board members of
other independent agencies such as the National Labor Relations Board, hinted
that he could not wield that power against the Fed. Why Powell would enjoy such security,
unlike other heads of agencies created by Congress, the conservative majority
did not say.
In any case, I don’t
think the Supremes can be counted on to aid Powell if he’s
dismissed.
Four decades ago,
“Doonesbury” cartoonist Garry Trudeau annoyed then-Vice President George H.W. Bush, then trying to placate the GOP right wing by changing some of his prior positions, with a strip on how he'd been persuaded to “place his
embattled manhood in a blind trust,” to be “restored to him only in times of
national emergency."
That phenomenon seems to
be occurring on the court of last appeal, with the only opposition to Trump’s
assault on the Constitution coming from the females on the bench—the three
Democrats joined, very occasionally, by the only Republican-appointed
woman, Amy Comey Barrett. The men? Missing in action during our current "national emergency."
With densely presented
data and periodic oracular pronouncements, the Fed has often seemed remote to most
Americans. (No surprise that William Greider’s history of the institution
was entitled Secrets of the Temple.)
But observers of central banks
the world over are doing little to hide their anxiety over Trump’s latest
attempt at winning through intimidation. Among the dreaded possibilities:
*Treasury Secretary Scott
Bessent adding the Fed to his responsibilities, in much the same way that
Secretary of State Marco Rubio now functions as effective head of agencies
closed via Elon Musk’s DOGE order;
*Trump naming a replacement
months before Powell actually steps down, diluting the authority of the current
Fed chair;
*Destabilizing foreign
markets because of rising yields on long-term U.S. government debt;
*Sinking the value of the
dollar;
*Whipping up uncertainty
in a market guessing at the government’s intentions;
*Creating a revolving
door of central bank heads directly controlled by a leader with authoritarian
aspirations—similar to Turkey, home of one of Trump’s favorite foreign allies, President Recep Tayyip Erdogan; and,
*Yielding to such leaders’
demand for low interest rates, no matter the circumstances—which, in Erdogan’s
case, has meant five central bank governors in the past six years, who
collectively have watched Turkey’s inflation rate climb to its current 35%.
Ultimately, the Powell
controversy revolves around two mindsets: Trump’s and the collective mental
calculus of those who could drive up prices.
The question of
Presidential mental acuity that ultimately unraveled Joe Biden’s reelection
chances should, by rights, now come into play in assessing Trump’s economic policy.
Last week, listener eyebrows shot up involuntarily when Trump said he was “surprised” Powell was appointed Fed chair, blaming the nomination on Biden—somehow
forgetting that he was the one who made the decision in 2017.
Together, management and
employees could factor in inflation permitted by a Trump-cowed Fed into their
own strategies, noted Josh Bivens’ “Working Economics Blog” post last
week on the Economic Policy Institute’s Website:
“If Trump degrades
confidence in the Fed’s political independence, any future inflation burst
(say, one driven by a large increase in budget deficits) could well get
embedded quickly into expectations, as workers and firms assume the Fed would
not be effective in constraining inflation going forward. People will begin
planning with inflation in mind and it could well begin accelerating.”