Trump's Obsession with the Fed: A Dangerous Game of Power and Economy
Trump will assert control over the U.S. Federal Reserve, aiming to exert influence on the nation's monetary policy.
By Hannes Vogel
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The US Federal Reserve, a beacon of economic reason, is under attack from none other than President Donald Trump. This institutions independence, long seen as the foundation of a robust global financial system, is at stake.
Last week, Trump called Jerome Powell, the Fed Chair, to the White House for a discussion on interest rates. The message was clear: Bring down the rates, boost growth, and save my reputation. But Powell remained unyielding. After the meeting, he declared that he had not discussed his expectations for monetary policy with Trump. Interest rate decisions, he said, are based solely on "careful, objective, and non-political factors."
Trump's frustrations with Powell are far from new. During his first term, he pushed to subjugate the Fed in a similar manner. He lambasted Powell then, labeling him "crazy," and demanding rate cuts. But he failed to bend the Fed to his will.
The situation has changed since then. Trump's efforts to control the Fed now come amidst a lack of opposition from the Supreme Court and Congress, both of which previously checked his power. The Fed, along with agencies, courts, and universities, is one of the few institutions that Trump seeks to dismantle due to their limitations on his power.
Trump's Obsession with Growth and Jobs
Trump's intentions are clear: Harness the Fed to create growth and jobs on command, allowing him to please his voters. This demand, shared by many US presidents since Richard Nixon, could have disastrous consequences. The independence of the US central bank is critical to the stability of the global financial system. The US, with its precarious debt burden, is already teetering on the edge of creditworthiness. If the Fed wobbles, it could send shockwaves through the US economy, trust in the dollar, and, potentially, trigger a global financial crisis.
Central banks in democracies are politically independent to protect them from short-term political interests. Their decisions affect trillions of dollars with regard to corporate borrowing costs, profits, the dollar exchange rate, growth, inflation, and employment. Ignoring this principle could threaten the long-term health of the economy.
A Battleground of Power and Politics
Trump has various options to exert pressure on the Fed. Public criticism or threats of dismissal could force Powell to cave in, just as it has with judges, agency chiefs, and political opponents in the past. But Powell, unlike others, has stood firm. The Supreme Court, too, seems unwilling to allow Trump to dismiss Powell for personal gain, maintaining that the Fed is a "unique, quasi-private institution" that deserves special protection.
Trump's determination to control the Fed extends beyond simple dismissal. Recent actions, such as requiring all oversight agency regulations to be approved by the White House, represent a direct attack on the Fed's autonomy. Additionally, rumors suggest that Treasury Secretary Steven Mnuchin is considering appointing a "shadow Fed chair" to undermine Powell's authority and credibility.
The Global Impact of a Weakened Fed
The undermining of the Fed's credibility could spark a panic in financial markets. Investors would hesitate to put their money in the US, and the US dollar would lose its status as the world's reserve currency, with significant consequences for Germany. Nearly a third of the Bundesbanks gold reserves still lie in the Fed's vaults, making Germany vulnerable to any fallout from a weakened Fed.
"Trump is unpredictable," remarks Markus Ferber, CSU MEP. "You can't rule out that he'll come up with creative ideas for dealing with foreign gold reserves."
In a world where Trump's political pressure influences monetary policy, economic uncertainty would reign. The markets would be in a state of perpetual chaos, akin to Trump's trade policy. This uncertainty could settle in the markets, leading to permanent financial panic and destabilizing the global economy.
Risks and Consequences
- Market Volatility
- Loss of Credibility
- Inflation Risks
- Global Spillover Effects
Conclusion
Trump's relentless attacks on the Federal Reserve pose a threat to the institution's independence and, by extension, the global financial system. The Fed's resistance is commendable, but ongoing pressure could erode trust, increase market uncertainty, and herald a new era of financial instability. If Trump continues to meddle in monetary policy, we could be facing unpredictable consequences for the US, the global economy, and even Germany's gold reserves.
Market Volatility
The Fed's independence is crucial for maintaining a stable financial market. If it becomes politicized, the resulting uncertainty could increase market volatility, making it harder to predict financial movements.
Loss of Credibility
A politicized Fed risks losing credibility among investors, making it more difficult for the institution to manage inflation expectations and financial crises effectively.
Inflation Risks
If the Fed succumbs to Trump's demands for lower interest rates, it could lead to premature rate cuts, fueling inflation, especially in an environment where supply shocks and tariffs drive up prices.
Global Spillover Effects
The US dollar and US monetary policy have global implications. If the Fed becomes less independent, it could affect investor confidence, capital flows, and exchange rates around the world, potentially destabilizing emerging markets and complicating international monetary policy coordination.
[1] Bendik, J. (2021). Trump's potential ways to oust Jerome Powell as a Fed chairman. MarketWatch. Retrieved from https://www.marketwatch.com/story/heres-how-trump-could-oust-powell-as-fed-chairman-11625641632
[2] Lucchetti, M. (2019). Trump Staffers Discussed Making the President an Unofficial Fed Governor. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/trump-staffers-discussed-making-the-president-an-unofficial-fed-governor-11562532213
- The economic and monetary union of EC countries, like the one in the US, is a crucial element of robust financial systems, protecting them from political interests.
- Discussing monetary policy with the president, as Jerome Powell did not, could increase investing uncertainty in the business world.
- The political interference in the Fed's monetary policy could have far-reaching effects on personal-finance, affecting borrowing costs, profits, and employment.
- In the tech-driven world, social-media platforms could play a significant role in spreading news about the US Federal Reserve's credibility and independence.
- The ongoing power struggle between Trump and the Fed may have repercussions on policy-and-legislation, affecting politics, pop-culture, general-news, crime-and-justice, and even sports, including sports-betting.
- Books on economics, politics, and global finance could provide valuable insights into the impact of Trump's actions on the Fed and the world economy.
- War-and-conflicts might arise if the global financial system experiences instability due to political influence over central banks like the Fed.
- The entertainment industry, including movies and music, could reflect the public's concerns about the Fed's independence and the resulting market volatility through storylines and themes.
