If Trump keeps intimidating the Fed, he will pay a price

The Federal Reserve in Washington, April 8, 2019. (Damon Winter/The New York Times)

By The Editorial Board

Donald Trump is not the first American president to be infuriated by the Federal Reserve’s management of the economy. One might say that the Fed was created to infuriate presidents. Elected officials want the economy to grow fast, now. The Fed’s job is to resist policies that deliver short-term highs and long-term adverse consequences. It is supposed to keep the economic porridge at just the right temperature: not too hot and not too cold.

Wise politicians have long appreciated the benefits of a central bank insulated from political pressure. They have understood that the Fed’s independence allows them to carp and caterwaul about its decisions without impeding its decision-making. They can insist that they would like to deliver faster growth, if only the Fed would let them.

The question hanging over the economy is whether Trump understands that doing anything more than complaining would be counterproductive.

The president is certainly getting his nickel’s worth at the complaint window. Trump and his allies have repeatedly attacked the Fed and its chair, Jerome Powell, for failing to deliver lower interest rates. They have engaged in vicious attacks on Powell’s character, including absurd allegations of fraud in the renovation of the Fed’s main campus.

The work is over budget and behind schedule, which is both a problem and a typical situation for government construction projects. There is no evidence of fraud. But on Thursday, to highlight the allegations of misconduct, Trump visited the central bank’s headquarters, joining a scheduled tour of the renovations and engaging in an awkward exchange with Powell as both men stood before the cameras wearing hard hats. After the tour, Trump stood in front of the Fed and told reporters that “we have to get interest rates lowered in our country.” He said he had made the same point to Powell directly. And he added, falsely, that the United States was not experiencing any inflation.

The subtext of Trump’s visit to the Fed, the first by a president in two decades, is that some of his aides are pressing him to use the renovations as a legal pretext to remove the Fed chair if Powell continues to resist Trump’s wishes. This month Trump showed congressional Republicans the draft of a letter firing Powell, though the president insisted afterward that he had no intention of removing the Fed chair before the end of his term in May 2026. Trump chose Powell for the job in 2017.

It is far from clear that Trump has the power to fire Powell, but even in raising the possibility, Trump is threatening the stability of the economy and the integrity of America’s political institutions.

The Fed is perhaps the most powerful of the technocratic agencies Congress has created to manage parts of the public’s business. It is charged with maintaining the health of the financial system and the stability of the broader economy. Its work mostly involves making small adjustments to a small dial called the federal funds rate. It is not necessary to understand the mechanics to comprehend the danger: Trump wants to get his hands on that little dial and twist it.

The Fed has made mistakes under Powell’s leadership, just as it has made mistakes under every one of his predecessors. To his credit, he has acknowledged that he and his colleagues moved too slowly to curb inflation as the economy emerged from the COVID-19 pandemic. Whether the Fed is now doing enough to encourage economic growth is also a legitimate subject of public debate. Some Fed officials agree with Trump that the Fed should be moving to lower interest rates. But Trump’s attacks on Powell are not motivated by principled disagreement about the path of monetary policy. The president is publicly humiliating the chair of the Fed because Trump believes that the Fed should be serving his interests, while Powell persists in serving the public interest. Trump’s antics are the behavior of a man who delights in dragging down anyone who refuses to bow down.

Trump is also trying to bully the central bank into concealing the damage caused by his own bad decisions. Past presidents, including Trump in his first term, pressed the Fed to lower interest rates because they wanted to boost economic growth. In recent months Trump has emphasized a second reason: He says that the Fed is making it unduly expensive for the federal government to borrow money. Trump, who has taken to referring to Powell as “Too Late,” wrote this month that “‘Too Late’ is costing the U.S. 360 Billion Dollars a Point, PER YEAR, in refinancing costs.”

The urgency of this concern is a product of Trump’s irresponsible fiscal policies. The government is increasingly vulnerable to higher interest rates because he and his congressional allies have pushed through legislation that will significantly increase federal borrowing in coming years. Rather than taking steps to reduce the size of the debt, Trump is trying to get the Fed to reduce the cost. He is threatening to shift the work of the central bank from controlling inflation to facilitating the government’s bad habits.

The danger for Americans, and the global economy, is that driving down short-term interest rates — the ones the Fed most directly controls — could drive up longer-term interest rates. Investors would probably regard a sharp cut in the Fed’s policy rate as inflationary gasoline. They would see it as evidence that the United States had abandoned any semblance of monetary discipline and could respond by demanding more compensation for long-term loans. Homebuyers might face higher mortgage rates. Corporations might shelve projects that no longer seemed profitable. What Trump does not appear to comprehend is that the Fed influences borrowing costs but it does not control those costs. It talks to the market, and the market talks back.

The advisers encouraging Trump should know better — and probably do. They are placing their personal ambitions above the national interest. He is looking for a successor to Powell, and some of the contenders appear to be auditioning by telling the president what he wants to hear. Kevin Warsh, a former Fed official who maintained a principled distance from Trump’s attacks on Powell during the president’s first term, now professes to agree. Kevin Hassett, the president’s chief economic adviser, seems willing to tell Trump whatever is necessary to win the job. Scott Bessent, the treasury secretary, appears to have a limitless appetite for the humiliating work of going on television to reassure investors that the president doesn’t really mean the things he just said.

We recognize that the Fed is a political institution, rather than a purely technocratic one. Congress establishes its goals and oversees its performance. And the Fed’s insulation from public sentiment can sometimes impede its economic management. Technocrats are not perfect. During the housing bubble of the early 2000s, for example, the Fed was far too deferential to Wall Street. But Trump has a habit of attacking imperfect institutions without any real plans to replace them with something better, and he is doing so in this case. He is offering a solution that is far worse than the underlying problem.

The country previously lived through the consequences of a central bank that is not sufficiently insulated from politics. President Richard Nixon’s success in strong-arming the Fed to keep rates low in the early 1970s is a big reason inflation soared. There are plenty of similar cautionary tales from other countries, including Italy in the 1980s and Turkey in the 2010s: When central banks are pressured by politicians into overheating the economy, everyone ends up getting burned.

Generations of political leaders from both parties have recognized that the interests of the American people are best served by placing monetary policy decisions in the hands of technocrats who have the mandate and the power to look past the next election. It is an imperfect system, but it has kept inflation substantially under control for the past 40 years. If the president has a better idea, he should share it with the American people.