Fed Independence: This “nuclear” scenario would point out that things really go from rails’

The consequences could have an impact on the daily life of most Americans: economists fear that if Trump gets what he wants – a faithful Fed which greatly reduces short -term interest rates – the result would probably be higher inflation and, over time, higher borrowing costs for things like mortgages, car loans and commercial loans.

Trump tried on Monday to dismiss Lisa Cook, the first black woman appointed to the board of directors of seven members of the Fed. It was the first time in 112 years of the Fed history that a president has been trying to dismiss a governor.

Trump said he was doing it due to the allegations raised by one of his named people that she had committed mortgage fraud.

Cook has argued in a trial seeking to block his dismissal that claims are a pretext for Trump’s real goal: to win more control over the Fed. A court may decide next week to temporarily block the dismissal of Cook while the case has been making its way in the legal process.

Cook is accused of claiming two houses as main residences in July 2021, before joining the board of directors, which could have caused a lower mortgage rate than if a second house or a placement building was classified. She suggested in her trial that it could have been an error in office but did not directly respond to the accusations.

Fed Independence “is suspended by a thread”

Trump and the members of his administration have made no secrets about their desire to exercise more control over the Fed. Trump has repeatedly demanded that the central bank reduced its key rate to 1.3%by its current level by 4.3%.

Before trying to pull Cook, Trump has repeatedly attacked the Fed chair Jerome Powell, not to have cut the short -term interest rate and threatened to dismiss him as well.

“We will have a majority very soon, so it will be good,” said Trump on Tuesday, a reference to the fact that if he is able to replace Cook, his named people will control the Fed board of directors with a 4-3 vote.

“The particular case of Governor Cook is not as important as what this last decision shows on climbing in the assault of the Fed,” said Jon Faust, economist at Johns Hopkins and former adviser to Powell. “In my opinion, nourished independence is really suspended by a thread.”

Some economists think that the Fed should reduce more quickly, although almost none agree with Trump that it should do 3 percentage points. Powell reported that the Fed should reduce a quarter of a point in September.

Why economists prefer independent central banks

The Fed exercises extensive power over the American economy. By reducing the short -term interest rate, it controls – which it generally does when the economy vacillates – the Fed can make borrowing cheaper and encourage more expenses, growth and hiring. When it increases the rate of combating higher prices that accompany inflation, it can weaken the economy and cause job losses.

Most economists have long preferred independent central banks because they can take unpopular measures that elected officials are more likely to avoid. Economic research has shown that nations whose independent central banks generally have lower inflation over time.

Elected officials like Trump, however, have much greater incentives to put pressure for lower interest rates, which allows Americans to buy houses and cars more easily and increase the economy in the short term.

A political Fed could stimulate inflation

Douglas Elmendorf, economist at Harvard and former director of the non -partisan congress budget office, said Trump’s demand for the Fed to reduce his key rate of 3 percentage points would overcome the economy, raising consumer demand above what the economy can produce and stimulating inflation – similar to what happened during the pandemic.

“If the federal reserve takes control of the president, we will end up with higher inflation in this country probably for the coming years,” said Elmendorf.

And while the Fed controls a short -term rate, the financial markets determine the longer term borrowing costs for mortgages and other loans. And if investors fear that inflation remains high, they will require higher yields on state bonds, which increases loan costs in the economy.

In Türkiye, for example, President Recep Tayyip Erdogan forced the Central Bank to maintain low interest rates in the early 2020s, while inflation increased to 85%. In 2023, Erdogan enabled the central bank more independence, which contributed to reducing inflation, but short -term interest rates increased to 50% to combat inflation and are still 46%.

Other American presidents have harassed the Fed. President Lyndon Johnson harassed the president of the time, William McChesney Martin, in the mid -1960s, to maintain low rates while Johnson increased public spending for the war and anti -operative programs in Vietnam. And Richard Nixon put pressure on the president of the Arthur Burns era to avoid rate increases in the approach of the 1972 elections. The two episodes were largely blamed for having led to the stubborn inflation of the 1960s and the 1970s.

Trump also argued that the Fed should reduce its rate to facilitate the funding of the federal government to finance its huge debt load by $ 37 billions. However, this threatens to distract the Fed of his Congress mandates to maintain inflation and low unemployment.

Independence vs responsibility

The presidents have a certain influence on the Fed thanks to their ability to appoint members of the board of directors, subject to the approval of the Senate. But the Fed was created to be isolated from short -term political pressures. The governors of the Fed are appointed to 14 -year -old staggered sentences to ensure that no president can name too much.

Jane Manners, professor of law at Fordham University, said that there was a reason why the congress decided to create independent agencies like the Fed: they preferred that “the decisions made from a sort of objective and neutral point of view based on expertise rather than decisions are entirely subject to political pressures”.

However, some Trump administration officials say they want more democratic responsibility for the Fed.

In an interview with USA Today, vice-president JD Vance said: “What people say that the president has no authority here actually says is that seven economists and lawyers should be able to make an incredibly critical decision for the American people without democratic contribution.”

And Stephen Miran, an economic adviser from the White House, wrote a newspaper last year pleading for a restructuring of the Fed, including to facilitate the fact that a president of the governors.

“The overall objective of this conception is to provide the economic advantages” of an independent central bank, wrote Miran: “while maintaining a level of responsibility that a democratic society must demand.” Trump appointed Miran to the Fed Board of Directors to replace Adriana Kugler, who resigned unexpectedly on August 1.

There could be more agitation

Trump personally insulted Powell for months, but his administration now seems much more focused on the wider structure of the Fed.

The Fed makes its interest rate decisions through a committee that consists of the seven governors, including Powell, as well as the 12 regional Fed banks presidents in cities like New York, Kansas City and Atlanta. Five of these presidents vote on prices at each meeting. The president of the New York Fed has a permanent vote, while four others vote on a rotating basis.

While banking reserve councils choose their presidents, the Fed board of directors in Washington can vote to reject them. The 12 presidents must be renamed and approved by the board of directors in February, which could become more controversial if the board of directors votes one or more of the 12 presidents.

“The nuclear scenario is … the renewal of the presidents of the reserve bank and interfering with this (which) would be the signal that things really get out of the rails,” said Adam Posen, president of the Peterson Institute for International Economics.