Why the Fed’s independence matters : NPR

President Trump’s tense, televised clash with Federal Reserve Chair Jerome Powell has raised concerns about the central bank’s independence ahead of this week’s meeting to consider interest-rate adjustments. While Trump isn’t the first president to pressure the Fed to cut interest rates, experts say his brash and bullying tactics are unprecedented.

After weeks of publicly criticizing Powell, Trump made a rare visit to the Fed’s Washington, D.C., headquarters on Thursday. During a tour of a $2.5 billion renovation project, Trump stood beside Powell in front of the cameras, waving a document that he said detailed major cost overruns. Powell shook his head in disagreement and firmly pushed back against the claim.

Trump himself nominated Powell to the top Fed post in 2017, proclaiming, “He’s strong, he’s committed, he’s smart,” but this month, the president seemed to forget all that, accusing Powell of being “too late” in lowering interest rates and expressing surprise that President Joe Biden had “put him in and extended him.” (Biden did reappoint Powell in 2021.) Trump has even floated the idea of firing the Fed chair, whose term expires next May — a move that would be legally contentious. Powell himself has said he won’t step down if Trump asks him to.

“Presidents have complained about bad policy, but they haven’t been as aggressive in their attacks on the institution as the Trump administration has been,” says Bill English, a professor at the Yale School of Management.

Trump “thinks he can behave in a way that doesn’t respect the checks and balances that are built into our institutions. And one of those checks and balances is the Federal Reserve System,” says Bob Hetzel, an author and former senior economist at the Federal Reserve Bank of Richmond.

The Federal Reserve — the nation’s central bank — helps maintain economic stability by managing monetary policy, setting interest rates, promoting stable prices and maximizing employment. In times of crisis, the Fed also serves as a lender of last resort, supplying emergency liquidity to banks and the broader financial system — as it did during the 2008 financial crisis and the COVID-19 pandemic.

The seven members of the Federal Reserve Board of Governors are nominated by the president and confirmed by the Senate to serve single, staggered 14-year terms. The chair is also nominated by the president and must be confirmed by the Senate to serve a renewable four-year term. While the chair can be chosen from outside the board, the individual must first be nominated and confirmed as a board member before assuming the role.

The board’s Federal Open Market Committee (FOMC) meets eight times a year, including this week, to set the federal funds rate, which banks charge each other for overnight borrowing. The rate is a key driver of economic activity and indirectly influences interest rates on credit cards, mortgages and other loans.

How important is Fed independence?

Over the years since its creation by Congress in 1913, the Federal Reserve’s independence has been considered essential for maintaining credibility with both financial markets and the public, according to Joseph Gagnon, a former senior Fed economist.

“That’s why they have staggered terms for the [board’s] governors … and the idea that the president cannot remove a person except for cause,” says Gagnon, now a senior fellow at the Peterson Institute for International Economics.

Michael Klein, a professor of economics at the Fletcher School at Tufts University, notes that while the decisions on setting interest rates are made collectively by the Fed Board governors, if Powell were to bend to the president’s will, “[we] would have an unprecedented situation if you have a chair seen as beholden to the president, and governors who feel differently. That kind of uncertainty can really hurt the economy.”

The Fed sometimes must make unpopular but necessary decisions, such as raising interest rates to curb inflation — as it did following the pandemic, when supply chain disruptions and pent-up consumer demand contributed to a surge in prices.

Today, the showdown between Trump and Powell is over precisely such an unpopular course of action: The Fed, which concludes its latest meeting on Wednesday, has been reluctant to lower the federal funds rate from the range of 4.25% to 4.5% because it hasn’t quite reached its stated goal of 2% inflation. More importantly, Powell has said he’s taking a wait-and-see approach to Trump’s tariff war, which could lead to higher prices.

Powell said of the Fed last year: “We don’t guess, we don’t speculate and we don’t assume.”

“We don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy would be,” he also said.

Have past presidents influenced the Fed?

Trump isn’t the first president to try to influence the central bank, Klein says. “Nixon famously put a lot of pressure on [then-Fed Chair] Arthur Burns to keep interest rates low in advance of the 1972 election.”

That pressure on Burns over a period of months, according to a handwritten diary kept during his years as chair and evidence from the infamous Nixon tapes, included a leaked threat that the White House would take over the Fed.

Ultimately, Burns lowered interest rates, a decision that economist Burton Abrams told NPR’s Planet Money that he thinks resulted from “a capitulation to Nixon.” Klein says that “one of the consequences of that was … the high inflation that we had in the 1970s.”

It’s hard to know for sure to what extent Burns was swayed by Nixon or just thought he was making sound policy that coincidentally aligned with the White House, Yale’s English says. Most people, he says, think Burns caved. As a result, “Nixon and Burns [are often seen] as an example of how things can go wrong.”

Paul Volcker, who became Fed chair in 1979, is widely credited with stabilizing the economy after the high inflation of the 1970s — largely through a sharp increase in the federal funds rate to restrict the money supply.

What would happen if the Fed bent to Trump’s pressure?

In countries such as Turkey, Venezuela and Argentina, “[we] have instances where the central banks are kind of beholden to the government. … These lead to really bad economic outcomes,” Klein says.

Gagnon, the former Fed economist, agrees that “history is full of episodes” of governments that tried to ease monetary policy in exchange for a few months or a few years of lower unemployment and strong growth. But “the trade-off is always inflation,” he says.

But even if Trump were to sack Powell or persuade him to call for lower interest rates, the president’s ability to influence the Fed’s decisions on rates is limited, says Hetzel, the former senior economist at the Federal Reserve Bank of Richmond.

If a newly appointed chair were to take control and try to push the funds rate down when it’s not appropriate, that person is “going to get a lot of dissent” from Fed policymakers, Hetzel says. “The prestige of the chairman comes from speaking for the FOMC. And as the chair gets a lot of dissents, this suggests that the Fed is divided, and that’s very discouraging and very disturbing to financial markets.”

Then there’s the legacy — both Powell’s and that of whoever becomes the next Fed chair. “Powell desperately wants to be the next Volcker, not the next Burns,” Gagnon says.

The same goes for whoever might replace Powell. “A new chair is going to have to deal with the fact that if he’s going to go to the Central Bank of Valhalla, he can’t leave his term with inflation. And he’s going to be interested in his own legacy,” Hetzel says.