Government Struggle for Power in the American Central Bank Losing Independence

U.S. President Donald Trump has openly opposed the policies of Fed Governor Jerome Powell for months. The reason for his dissatisfaction is the level of interest rates set by the Fed, which Trump believes should be much lower. Trump has stated several times that interest rates should be three percentage points lower than they are today. In mid-July, the president announced the possibility of firing the Fed governor, but the market quickly forced him to hit the brakes. In just a few minutes, the U.S. dollar lost 1.5 percent of its value against other world currencies, long-term bond interest rates rose significantly, and stock indices corrected by one percent.

The U.S. president is very cautious regarding the capital markets, so he decided to pursue lower interest rates through other channels. As certain Fed governors’ terms expire, he will nominate candidates he is confident will serve his policies. However, he did not have to wait long for some positions, as Adriana Kugler (one of the Fed governors) unexpectedly resigned in early August, and he nominated Stephen Miran (the chief architect of Trump’s trade policy and tariffs) to replace her, which the Senate will soon confirm.

Just three weeks later, Trump issued an official document firing Lisa Cook for alleged fraud regarding residency documentation and bank credit. Lisa Cook refused to resign from her position, stating that the U.S. president can only fire a governor for proven criminal actions, which he will have to prove in court. Just a day after announcing the ‘release letter’ for Lisa Cook, Trump stated that he would soon have a majority in the Fed. This means he will influence the Fed governors who vote on monetary policy and will lower interest rates to those he deems appropriate.

Although most of the Fed’s administration is appointed by U.S. presidents, the public has until now had the impression that monetary policy is as independent of the government as it can be. Evidence of how much monetary policy in the U.S. is currently influenced by Trump and his administration is best seen in the latest minutes from the Fed’s July meeting, where it was decided that interest rates would remain at the same level (4.25-4.50 percent) at least until the next meeting in September.

The minutes from the meeting, which are usually published three weeks after the meeting, state that two governors voted against the majority decision. Michelle Bowman and Christopher Waller were in favor of lowering interest rates. This information is not surprising to someone who does not regularly follow U.S. monetary policy, as it is logical that there are occasional disagreements on policy, as is the case with the European Central Bank. However, in the Fed, decisions are made in such a way that the majority agrees on official decisions at the meeting, and then everyone votes for them to make the Fed’s decisions appear uniform. In the last 30 years, there have been several meetings where one governor disagreed with the common decision, and the last time we saw two disagreements was in 1993. Of course, both Michelle Bowman and Waller were nominated for their positions by Trump, and Bowman is one of the main candidates for Fed governor after the current governor Powell’s term ends in May next year.

In recent months, it has become clear that the Fed is not an independent institution, and in the coming months, the positions will become increasingly distant as the number of voters in the central bank rises in favor of the current president, who is determined to lower interest rates as quickly as possible to further stimulate the economy. Jerome Powell has resisted Trump’s attacks and even personal insults for several months, but it seems he has finally given in a little. At the central bankers’ conference in Jackson Hole, he surprised the public by stating that the risks of higher unemployment are potentially greater than the risks of higher inflation, which was a signal to the market that he would certainly cut interest rates in September.

The question remains why Powell has given in, even though inflation has been above the target rate for several years and seems to be on the rise again. We may get an answer to that question in mid-September when he has the next meeting, but it is certain that Powell’s term ends in less than a year, and Trump will have the freedom to decide on monetary policy as well. Some analysts and scholars compare such decisions to those made a few years ago by Turkish President Recep Erdogan, after which the Turkish lira depreciated nearly 50 percent in just three months. It is hard to expect such shifts from the world’s most important currency, but that does not mean that the U.S. president cannot do similar things and fire the governor. After all, he has said that he would do that job much better.