The Independence of the Federal Reserve is America's Golden Goose
President Trump has aggressively called for the Federal Reserve to ease monetary policy, to which he’s increasingly added calls for its chair, Jerome Powell, to resign.
The main reason the U.S. and other advanced economies grant their central banks a measure of independence is to instill confidence that they won't make policy based on what's most convenient in the near-term for elected leaders - such as cutting rates to spur short-term economic growth.
Yet that is exactly the grounds President Trump has repeatedly invoked as the reason he believes the Fed should cut rates drastically.
The reckless 3% interest rate cut Trump has proposed would put the Fed's policy in ultra-stimulative mode at just the wrong time. Unemployment is low, inflation remains stubbornly elevated, and on and off tariffs threaten a price surge over the next year.
Putting the central bank under the political control of a nation’s leader is a death wish and a red flag for investors. Such a move is unworthy of a great country like America and reminds me of many of the worst performing emerging markets I follow as a financial analyst.
After moves to politicize Hungary’s central bank, all three major ratings agencies downgraded Hungary’s sovereign credit rating to junk status, leading to borrowing costs higher and causing its currency, the forint, to fall. Turkey’s central bank politicization has been even more extreme, with inflation running at more than 15%.
Finally, the firing of the Fed Chair would roil markets with a low probability of achieving the goals of a new Fed chair or lower interest rates.
Mr. Trump’s nominee would need Senate approval after an inevitable fight over the legality of any move against Mr. Powell. Further, a rate change would require a majority of the 12 voting Fed officials to agree.
Presidents oftentimes are at odds with central bank policy since their time frame is much shorter and their impatience greater.
This is all about a president needing to share power, and the need to respect checks and balances, norms, and traditions
This is what the global investors appreciate about America’s brand of “dynamic stability” when they choose to invest in our bond and stock markets.
Don’t kill the golden goose.