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.”
