Trump is trying a new method to take control of the Fed without ruling out Jerome Powell (which is wrong with the US economy)

A new attack on the independence of Fed. In recent days, Donald Trump has accentuated his recovery campaign from the United States Central Bank that wants to fire Governor Lisa Cook. That, in response, justice has seized to denounce an “unprecedented and illegal attempt” of revocation that “would constitute a precedent in the history of the Council” of the governors.

The initiative of the White House tenant is “not only illegal”, but also “deeply dangerous” because “threatens the credibility of the United States,” also deplored the former head of the Janet Yellen institution on a platform published in the Financial Times.

According to her, “by attacking Cook, Trump sends an ice formation message to all members” of the committee voting on US interest rates, 12 in number (the seven of the Governors’ Council, the president of the Fed of New York and four regional presidents that change from one year to another): “If you express your disagreement with the president, you are the following.”

Get a drop in interest rates

When revoking Governor Cook, Donald Trump seems to take a new step in his desire to take control of the Fed. On several occasions, the US president seemed to try to return to the president of the institution, Jerome Powell, before retiring to the fever of financial markets. He also requested his resignation and implied his management of the renewal work at the Fed headquarters in Washington.

So many attacks to obtain from the Federal Reserve the fall in the rates that Trump has been claiming for months. But not to expel Jerome Powell, the new strategy of the White House tenant now seems to be to remodel the rest of the Federal Reserve Committee, to place the most in line with their vision of the economy.

“President Trump uses all possible levers to try to have a majority in the Council of Governors hoping that interest rates will decrease,” David Wessel, Brookings Institution researcher, with AFP, observed with AFP.

“He wants to control the Fed,” whose credibility “as an anti -inflant firefighter will be questioned,” according to him.

“It could have significant repercussions”

In recent days, Jerome Powell has received the support of many central bankers, starting with Christine Lagarde: “When a central bank ceases to be independent, or when its independence is threatened, it becomes dysfunctional. It is beginning to do things that you should not,” he warned the president of the ECB. If Trump reached its ends, it would be “a very serious danger to the American economy and for the global economy,” he also said on classical radio, remembering that the policy of the American Central Bank (Fed) “obviously has effects in the United States to maintain prices and guarantee optimal employment.”

“However, the independence of the Fed is an inviolable principle since the 1980s,” said the governor of the Central Bank of Finland, Olli Rehn, a member of the Council of Governors of the European Central Bank (ECB). “Today, however, this principle is seriously greeting. This could have significant and global repercussions on financial markets and real economy,” he warned.

At this stage, however, investors do not seem too worried: “There is no doubt, in our opinion, that the Fed is now exposed to the growing risks of domination” by the Executive Power, observes the analysts of Deutsche Bank. But the “most surprising” is that “markets are only worried.”

Pimco’s economist, Tiffany Wilding, also points out that “the market reaction for this news has been relatively moderate so far.” However, it ensures that the strengthening of fears in the independence of the Federal Reserve can cause “greater uncertainty, higher term bonds and a more pronounced slope of rate curves.”

Inflation risk

But more than the markets, it is above all the American economy that will first suffer from a loss of independence of the Fed, according to Janet Yellen: “Party central banks produce greater inflation, erratic growth and lower currency,” he warned.

A reinforced analysis with CNN by Davide Romelli, associated professor at the Department of Economy of Trinity College in Dublin: “What we know according to literature is that every time there is a perceived pressure or a decrease in the degree of independence of the Central Bank in a country, expectations compared to inflation generally increase, and therefore, households and forecast predict a future damage.”

The IMF itself insisted last year on “the primary importance of the independence of the central banks that was demonstrated by numerous works.” A study by the Washington institution related to several dozen central banks during the period between 2007 and 2021 has noted significantly “that those with a high level of independence have managed to dominate the anticipations of inflation of their population, which helps contain inflation to a low level.”

Pressures on Fed far from unprecedented

Contemporary control examples of a central bank by the Executive Power are not really glorious. In Turkey, in particular, President Rece Tayyip Erdogan dismissed several directors of the Turkish Central Bank between 2019 and 2021 who decided to increase interest rates to control inflation (Erdogan estimated that it is the fall in the fees that made it possible to get there). In the months that followed, inflation exploded, from 16.7% to early 2021 to 85.5% at the end of 2022, and Türkiye ended up falling into the spiral of the debt. Since then, given the anger of public opinion, the country has noticed that its fees and inflation have slowed down while remaining at a high level (33.5% in July).

Without reaching extreme cases, the United States also experienced periods when the Executive tried to press Fed. In 1965, President Lyndon Johnson did not hesitate to summon the head of the Federal Reserve William McChesney Martin to his ranch to push him to soften his monetary policy against inflation. Five years later, Richard Nixon thanked William McChesney Martin, who preferred to name one of his followers: Arthur Burns.

At the beginning of his mandate, the latter opposed the mandates of the White House tenant to increase the supply of money. He will end up ordering behind Nixon after being attacked by a press campaign that denigrates him. Without much success since US inflation increased from 3.3% in 1971 to 11.8% in 1974.