President vs Fed Chair: a Trump‐Created Issue or a Historical Tradition of Tension?
“We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions.”
— Federal Reserve Chairman Jerome Powell
Historians may regard Donald Trump as the most polarizing figure to ever occupy the Oval Office, and his prolonged tension with Federal Reserve Chairman Jerome Powell, whom he appointed himself just a little over a year ago, only adds to the controversy surrounding his presidency.
At the center of the feud is the question of whether the Fed should continue to raise interest rates. Since Trump signed into effect the “Tax Cuts and Jobs Act of 2017”, significant quantities of money were driven into the US economy, which is widely considered to be already steadily growing. The Fed, seeing the potential threat of long-term inflation, responded by utilizing one of the oldest monetary instruments— increasing the Federal Funds rate—to curb the supply of money and keep the economy from overheating. On January 30th, Chairman Powell announced that the reserve will follow through on its plan to increase its benchmark funds rate from 2.25 to 2.5%, citing concerns of unpropitious inflation forecasts.
Higher interest rates do not bode well for economic growth in the short term. A slower flow of money hampers spending and investment, which are major drivers of GDP growth. This tradeoff between short term growth and long-term stability is oŌen a source of disagreement between the Fed and the administration, who hurries to claim as much growth as possible during its tenure. Thus, unsurprisingly, President Trump took no time before attacking the Fed’s decision. In typical conduct, the president lashed out against Powell’s actions on twitter as well as on numerous other occasions. His promise of 4% GDP growth across a calendar year has not reached fruition, and increases in interest rates further threaten his ability to generate the 25 million jobs he promised during his campaign.
The President’s controversial antics have garnered considerable backlash from across the political spectrum and among the public and media.The question begs to be asked: are criticisms of Trump’s behavior the result of a societal myopia, or are they justified? We can look to history to contextualize the tension.
Truth be told, strain between these two positions of power is nothing out of the ordinary. Lyndon Johnson certainly fought with his Federal Reserve chairman, both figuratively and literally. In 1965, an increase in military expenditures and the simultaneous implementation of tax cuts provoked a predictable response from the Reserve: an uptick in short term interest rates. Johnson responded with profuse anger and invited Fed Chair William Martin to his ranch to imprudently insist that the Fed reverse its course of action. Met with calm rejection, Johnson proceeded to physically push Martin.
The Nixon tapes reveal a similar history of coercive behavior directed towards the Fed. In 1972, President Richard Nixon reportedly insisted that Fed Chairman Arthur Burns engage in certain quantitative easing actions to optimize his prospects in the following election. Despite lingering debates, most economists contend that Burns capitulated to the pressure.
While Johnson and Nixon’s exceptionally perverse behaviors might not typify presidential conduct, they still evidence the tension that can arise from political motives. Alan Greenspan, a member of the Fed Board for 18 years, noted an unfathomable amount of occasions in which he received politically charged suggestions on how to govern such an apolitical body.
So, history clearly shows that Trump’s conduct is nothing new, but does that absolve him of his mishaps? Put briefly, a history of unjustifiable actions does not excuse the conduct of our current president. The Reserve’s members earn their positions through a meritorious process in which their display of economic knowledge culminates in senatorial approval. This process exists for a reason: to deter political influence from a body whose decisions largely impact the world economy.
These threatening political sentiments stem from a business infiltrated with absurd amounts of lobbying, excessive uses of authority, and the occasional (perhaps prevalent) disregard for the common good. Grassroots movements may create inroads into ridding our systems of corruption, but the legislative sector will most likely never be fully exculpated of unjust political interests. That leaves the Federal Reserve as the sole public mechanism to safeguard the national economy when governmental systems go awry, and their decisions should not be susceptible to the mess we know as “politicking”.
While Donald Trump has not pioneered presidential criticism of the Fed Chair, a history of disrespect towards the reserve’s apolitical etiquette does not justify his sustained reprisal of Jerome Powell’s actions. A newfound respect for autonomous institutions would not only salvage what’s left of Donald Trump’s controversial legacy, but also enable a body of experts to properly place a check on his fiscal policy initiatives.
Written By Andreas Papoutsis, Undergraduate Economics Student
1. www.bankrate.com/banking/federal‐reserve/fomc‐recap/
2. money.cnn.com/2017/01/20/news/economy/donald‐trump‐jobs‐wages/index.html
3. https://www.marketwatch.com/story/the‐history‐of‐presidential‐fed‐bashing‐suggests‐it‐has‐not‐been‐a‐fruiƞul ‐strategy‐2018‐10‐11
4. www.politico.com/story/2018/08/29/trump‐federal‐reserve‐jerome‐powell‐richard‐nixon‐799209