Why is an independent Fed important? Just look at Ronald Reagan’s saving with Paul Volcker’s hiking rates at almost 20%

The governor of the federal reserve, Lisa Cook, says that she will not leave her post.

Trump has repeatedly attacked the Fed chair, Jerome Powell, not having reduced his short -term interest rate, and even threatened to dismiss him. Powell, who will speak on Friday during an economic symposium at Jackson Hole, Wyoming, says that the Fed wants to see how the economy reacts to Trump’s radical prices on imports, which, according to Powell, could push inflation.

Powell’s prudence made Trump, who demanded the Fed, reduced borrowing costs to stimulate the economy and reduce interest rates that the federal government pays for its debt. Trump also accused Powell of having poorly managed the building renovation project of $ 2.5 billion from the American central bank.

The dismissal of the Fed chair or the forcing of a governor would threaten the revered independence of the Fed, which has long been supported by most economists and investors of Wall Street. Here’s what you need to know about the Fed:

Why the independence of the Fed is important

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 less and encourage more expenses, accelerate growth and hiring. When it increases the rate – which it does to cool the economy and fight inflation – it can weaken the economy and cause job losses.

Economists have long preferred independent central banks, as they can more easily take unpopular measures to combat inflation, such as increase in interest rates, which makes borrowing to buy a more expensive house, car or device.

The importance of an independent Fed was cemented for most economists after the prolonged inflation peak in the 1970s and the early 1980s. The former president of the Fed, Arthur Burns, was largely blamed to have allowed the painful inflation of this time to accelerate by succumbing to the pressure of President Richard Nixon to maintain low rates before the 1972. high cost him the elections, which he won in a landslide.

Paul Volcker was finally appointed president of the Fed in 1979 by President Jimmy Carter, and he pushed the short -term rate of the Fed at the incredibly high level of almost 20%. (It is currently 4.3%). Eyes fire rates have triggered a strong recession, pushed unemployment to almost 11% and prompted widespread demonstrations.

However, Volcker did not start. In the mid -1980s, inflation fell to figures to a low figure. Volcker’s desire to inflict pain in the economy in gas inflation is considered by most economists as a key example of the value of an independent Fed.

Investors look closely

An effort to dismiss Powell would almost certainly lead to a decrease in the share of equity and bond yields to increase, increasing interest rates on public debt and the increase in borrowing costs for mortgages, car loans and credit card debt. The interest rate on the treasure at 10 years is a reference for mortgage rates.

Most investors prefer an independent Fed, partly because it generally manages inflation better without being influenced by politics but also because its decisions are more predictable. Fed officials often discuss publicly how they would change interest rates policies if economic conditions modified.

If the Fed was more influenced by politics, it would be more difficult for the financial markets to anticipate – or understand – its decisions.

The independence of the Fed does not mean that it is not responsible

Nourished chairs like Powell are appointed by the president to serve four -year mandates and must be confirmed by the Senate. The president also appoints the six other members of the Fed Board of Directors, which can serve staggered conditions up to 14 years.

These appointments can allow a president over time to considerably modify the fed policies. Former President Joe Biden appointed four of the seven current members: Powell, Cook, Philip Jefferson and Michael Barr. A fifth named by Biden, Adriana Kugler, resigned unexpectedly on August 1, about five months before the end of her mandate. Trump has already appointed his best economist, Stephen Miran, in potential replacement, although he will demand the approval of the Senate. Cook’s mandate ends in 2038, so forcing it to go out would allow Trump to appoint a loyalist earlier.

Trump will be able to replace Powell as president of the Fed in May 2026, at the expiration of Powell’s mandate. However, 12 members of the FED interest rate adjustment committee have a vote on the opportunity to increase or reduce interest rates, so even replace the president does not guarantee that the Fed policy will change as Trump wants.

Congress, on the other hand, can set the objectives of the Fed through the legislation. In 1977, for example, the Congress gave the Fed a “double mandate” to maintain stable prices and seek maximum employment. The Fed defines stable prices as 2%inflation.

The 1977 law also requires that the president of the Fed testifies to the Chamber and the Senate twice a year on the economy and the interest rate policy.

Could the president draw Powell before the end of his mandate?

The Supreme Court suggested earlier this year in a decision on other independent agencies that a president cannot dismiss the president of the Fed simply because he does not like the political choices of the president. But he can be able to remove it “for good reason”, generally interpreted as signifying a kind of reprehensible acts or negligence.

This is a likely reason why the Trump administration focused on renovating the building, in the hope that it could provide a pretext “for good”. However, Powell would probably fight any attempt to withdraw it, and the case could end at the Supreme Court.