WASHINGTON (AP) — President Donald Trump’s attempt to fire members of the Federal Reserve Management Committee has issued an alarm between economists and economists and legal experts who view it as the biggest threat. Central bank independence In decades.
The results can affect the daily lives of most Americans. Economists worry about what Trump wants: the loyal Fed that sharply cuts short-term interest rates, and the results will be higher inflation and higher borrowing costs for mortgages, car loans and business loans over time.
Trump on Monday I was about to fireLisa Cook, First black woman He was appointed seven manufacturers of the Fed. It was the first time in the Fed’s 112-year history that the president had tried to fire the governor.
Trump said he was doing so because of allegations that one of his appointees committed mortgage fraud.
The chef has it Discussed in the lawsuit The claims are trying to block her firing as an excuse for Trump’s true goal. The court can decide whether to do so next week Temporarily blocks Cook’s firing This case goes through legal proceedings.
Cook has been accused of claiming two homes as major homes before joining the board in July 2021, which could lead to a lower mortgage rate than if it were classified as a second home or investment property. She suggested in the lawsuit that it may have been a clerical error, but she did not directly address the charges.
Independent “hanging in thread”
Trump and his administration members have not kept secret about their desire to put more control over the Fed. Trump has repeatedly requested that central banks reduce key rates from 4.3% to 1.3% lower than current levels.
Trump before trying to fire a chef I attacked repeatedly Federal Reserve Chairman Jerome Powell threatened to fire him without cutting short-term interest rates.
“We have a very majority, so that’s good,” Trump said Tuesday.
John Faust, Johns Hopkins economist and former Powell adviser, said: “In my opinion, Fed Independence really depends on the thread.”
Some economists believe the Fed should cut faster, but virtually no one agrees with Trump that it should do so with 3% points. Powell I signaled The Fed could be cut by quarter in September.
Why economists prefer independent central banks
The Fed is wielding widespread power over the US economy. By reducing short-term interest rates, it controls – it usually does When the economy is declining – The Fed can make borrowing cheaper and promote more spending, growth and employment. Raising rates to combat higher prices associated with inflation can weaken the economy and lead to unemployment.
Most economists have long preferred independent central banks because they can take unpopular measures that are likely to be avoided by elected officials. Economic research shows that countries with independent central banks usually have lower inflation over time.
But elected officials like Trump have far greater incentives to drive lower interest rates, making Americans more likely to buy homes and cars, and in the short term they boost the economy.
The political Fed may promote inflation
Douglas Elmendorf, an economist at Harvard University and former director of the Non-Partificial Congressional Budget Office, said Trump’s demand for 3 percent points would cut the economy by excessively reducing consumer demand, boosting inflation and driving what happened during the pandemic.
“If the Federal Reserve is under the president’s control, we will likely have higher inflation in this country.
Additionally, while the Fed controls short-term rates, the financial market determines the long-term borrowing costs for mortgages and other loans. And if investors are worried that inflation will remain high, they will demand higher yields on government bonds, boosting borrowing costs across the economy.
In Turkey, for example, President Recept Tayyip Erdogan forced the central bank to keep interest rates low in the early 2020s, even if inflation surged to 85%. In 2023, Erdogan helped central banks reduce inflation, but rose to 50% to combat inflation, allowing central banks to increase independence. Still 46%.
Other US presidents have bagged the Fed. President Lyndon Johnson harassed then-chairman William McShesney Martin in the mid-1960s as Johnson increased government spending on the Vietnam War and the counter-death program. And Richard Nixon put pressure on then-chairman Arthur Burns to avoid a gradual hike up until the 1972 election. Both episodes have been widely criticized for leading to stubbornly high inflation in the 1960s and ’70s.
Trump also argues that the Fed should lower that rate to facilitate the federal government’s immense $37 trillion debt burden. But it threatens to divert the Fed from Congressional mission to keep inflation and unemployment low.
Independence and accountability
The President has some influence on the Fed through his ability to appoint board members subject to Senate approval. However, the Fed was created to be insulated from short-term political pressures. The Fed governor will be staggered into a 14-year term to ensure that too many presidents cannot be appointed.
Jane Manor, a law professor at Fordham University, said there was a reason why Congress decided to create an independent institution like the Fed.
However, some Trump administration officials say they want more democratic accountability with the Fed.
In an interview with Vice President JD Vance of USA Today, “The people the president is saying are not authorized here is that seven economists and lawyers should be able to make incredibly important decisions for Americans who have no democratic opinions.”
Written by Stephen Milan, economic advisor to the Top White House paper Last year, they advocated a restructuring of the Fed, including making it easier for the president to fire governors.
“The overall goal of this design is to provide the economic benefits of an independent central bank,” writes Milan, “while maintaining the accountability that a democratic society has to demand.” Trump Nominated Milan went to the federal government board on behalf of Adriana Coogler, who unexpectedly resigned on August 1st.
There may be more confusion ahead
Trump has personally shamed Powell for months, but his administration now appears to be focusing on the broader structure of the Fed.
The Fed will make interest rate decisions through a committee consisting of seven governors, including Powell, and 12 presidents of regional Fed banks in cities such as New York, Kansas City and Atlanta. Five of these presidents vote for the fee at each meeting. The federal president of New York will vote permanently, with the other four votes on a spin-revolving basis.
While the board of directors of the reserve bank selects president, the Federal Reserve Committee in Washington can vote to reject them. All 12 presidents must be reappointed and approved by the board in February.
“The nuclear scenario is… reappointing the president of the Reserve Bank and obstructing it. This signal that things are really off the railroad.”
