Donald Trump is running serious risks in his hectoring of the US central bank, the Federal Reserve Board and its chair, Jay Powell. The Fed ignored Trump’s demand for an immediate interest rate cut when it announced the outcome of the deliberations of its policy-making council at its recent meeting in mid-June. But since then the president has unleahed a stream of criticism at the Fed chair. Last Friday he said he would “love” Powell to resign as he was doing a “lousy” job. He has threatened to name a replacement, even though Powell’s term still has 11 months to run, a move that would further undermine the incumbent.
Trump thrives on conflict and the resulting publicity. No doubt previous presidents have, in private, tried to nudge the Fed to cut interest rates, or not to increase them. But in public, administrations have generally respected its independence. Trump is choosing a different course.
The point of central bank independence is that the monetary authority often has to do unpopular things to bear down on inflation. This underpins investor and consumer confidence – and leads to a more stable economic environment in the long term. Were it to be seen to do Trump’s bidding, the independence of the Fed would be undermined. Trump has made clear that a new nominee would have to be prepared to cut interest rates. The affair underlines the contradictions of the president’s economic agenda. Trump is calling for lower rates at the same time as he is imposing tariffs and threatening more. And these import taxes push up US inflation. He is also trying to get Congressional agreement for his “big, beautiful budget bill” which will add to US borrowing and the national debt. Investors look on nervously here, too, fearful of the huge borrowings the US government is going to have to engage in.
To improve his budget numbers, Trump needs faster growth. Lower interest rates are one way to achieve this. By undermining Powell’s position, Trump will only add further to existing nerves among investors about increasingly unpredictable US economic policy.
