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An attempt by US President Donald Trump to dismiss a member of the Board of Directors of the US Federal Bank, caused anxiety for economists and lawyers, who for decades consider it the biggest threat to the independence of the Central Bank.
If the White House manages to push the Fed to a rapid reduction in interest rates, you can see cheaper lending in a very short time, but investors can expect higher inflation, which can lead to an increase in long -term costs such as mortgage loans.
That is why the battle for the independence of the Fed is important, and the avoidance of policy helps to maintain inflation – and the cost of borrowing is more stable and predictable.
Trump is trying to remove Lisa Cook
Trump tried to dismiss Lisa Cook last Monday, the first black women appointed to the Council for Seven FRS members.
This was also the first time in the 112 -year history of the Fed, when the US president tried to dismiss the commander.
Trump said that he did this from the statements made by one of his appointed, that he made fraud on loans.
Cook supported in treatment seeks to prevent his dismissal These accusations are a pretext for Trump’s real goal, that is, to get more control over the Fed. The court may decide next week, whether Cook should be temporarily prevented, while the case will be in his legal course.
Cook is accused of two houses as the main houses in July 2021, which can lead to a lower mortgage rate than if one of them had been described as the second place of residence or investment property. In her trial, she said that this could be a bureaucratic mistake, but did not answer immediately.
Fede’s independence hangs from the thread
Trump and his government members did not hide their desire to exercise more control in the Fed. Trump repeatedly demanded the Central Bank to reduce its main interest rate to 1.3% from 4.3% today.
Before trying to dismiss Cook, Trump repeatedly attacked the president of the US Federal Bank Jerome Powell Because he did not reduce the short -term interest rate and threatened to dismiss him.
“We will have a majority very soon, so it will be good,” Trump said on August 26, referring to the fact that if he can replace the Cook, his appointed audit of the Board of the Fed’s 4-3 votes.
“This particular case of Cook commander is not as important as this last step on the escalation of attacks on the Fed,” said John Faust, an economist from John Hopkins University and former adviser to Powell.
“In my opinion, the independence of Fed is now really hanging from the branch.”
Some economists believe that the Fed should reduce interest rates faster, although almost no one agrees with Trump that he should do this by 3 percentage points. Powell noted that the Fed will probably reduce the quarter of the unit in September.
Why economists prefer independent central banks
The Fed exercises vast power over the American economy. Reducing the short -term interest rate – what it usually does when the economy is overloaded – the Fed can be lending cheaper and stimulate more costs, growth and set of staff. When it increases the interest rate to combat the highest inflation prices, this can weaken the economy and lead to loss of jobs.
Most economists have long preferred independent central banks, because they can take unpopular measures that benefit the economy, and not in favor of short -term political goals, which elected officials are more likely to avoid. Economic polls showed that countries with independent central banks usually have lower inflation over time.
However, selected officials, such as Trump, have much greater incentives for achieving lower interest rates that make it easier for Americans to buy houses and cars and increase the economy in the short term.
Fed’s policy can improve inflation
Douglas Elmandorf, an economist in Harvard and the former director of the Congress, who is not involved in the group, said that Trump’s demand for the Fed will reduce his main interest rate by 3 percentage points by increasing its consumer during the pandemic.
“If the US Federal Bank is under the control of the President, then we will find ourselves in higher inflation in this country, probably in the coming years,” Elmenorf said.
Although the Fed controls the short -term interest rate, financial markets determine the long -term cost of borrowing for mortgage loans and other loans. And if investors are concerned that inflation will remain high, they will need a higher profitability of government bonds, which increases the cost of borrowing throughout the economy.
For example, in Turkey, President Recep Tayyip Erdogan forced the Central Bank to support low interest rates in the early 2020s, even when inflation was increased to 85%. In 2023, Erdogan allowed the Central Bank more independence, which helped reduce inflation, but short -term interest rates increased to 50% to combat inflation and are currently 46%.
Other US presidents incorrectly used the Fed in the past. President Lyndon Johnson pursued the then President William McChency Martin in the middle of the -1960s to maintain interest rates at low levels, as Johnson increased state expenses for war and poverty programs in Vietnam. And Richard Nixon gave the then President Arthur Burns to avoid interest rates during the election in 1972. Both episodes are widely accused of constant high inflation of the 1960s and 1970s.
Trump also argued that the Fed will have to reduce their interest rate to help the federal government finance their huge debt load of $ 37 trillion (31.56 trillion euros). Nevertheless, this threatens to distract the Fed from the Congress team to maintain inflation and unemployment at low levels.
Independence over accounting
Presidents have some influence on the Fed due to their ability to appoint members of the board of directors without prejudice to the approval of the Senate. But the Fed was created to be isolated from short -term political pressure. FRS governors have been appointed 14 years to guarantee that no president can appoint too much.
Jane Manners, a professor of law at the University of Fordham, said that there is a reason why Congress decided to create independent organizations such as the Fed – preferred “decisions made by a kind of objective, neutral advantage based on experience.”
Nevertheless, some government officials Trump say they want more democratic responsibility in the Fed.
In an interview with USA Today, the Vice -President of JD Vance said: “What says that the president says that there is no power here, in fact, say that seven economists and lawyers should be able to make an incredibly critical decision for the American people without any democratic contribution.
And Stephen Miran, a leading financial consultant in the White House, wrote a document last year that supported the restructuring of the Fed, including assistance to the president to dismiss commanders.
Miran wrote that “the general goal of this plan is to provide financial benefits from the” independent Central Bank “, while maintaining the level of responsibility that must demand a democratic society.”
Trump invited Miran to the Board of Directors of the Federal Reserve to replace Adrian Kugler, who unexpectedly resigned on August 1 of this year. It is not yet clear how long the Senate decision will reach his appointment.
There may be more shocks in the future
Trump personally aimed at Powell for several months, but his government seems to focus more on the wider Fed structure.
The Fed makes its decisions on interest rates through a committee, consisting of seven governors, including Powell, as well as the 12th Presidents of the Federal Reserve of Regional Banks in cities such as New York, Kansas -City and Atlanta. Five of these presidents vote for interest rates at each meeting. The President of the New Yorka Fed has a constant vote, while four vote for rotation.
While reserved banks’ advice is choosing their presidents, the Federal Council Board of Directors in Washington can vote for their refusal. All 12 presidents must be indicated and approved by the board of directors in February, which may become more controversial if the Council votes against one or more of 12 presidents.
“The nuclear scenario is … re -training of presidents of reserved banks and interference in IT (which) will be a message that everything is actually leaving the highway,” Adam said, the president of the St. Peterson International Finance Institute.