What happens if Trump takes over the Federal Reserve? | If You're Listening | ABC NEWS In-depth

Key Concepts

• Monetary Policy vs. Fiscal Policy: Distinction between government spending/taxation (fiscal) and central bank control over money supply/interest rates (monetary).
• Federal Reserve (The Fed): The central bank of the United States, responsible for monetary policy.
• Interest Rates: The cost of borrowing money, a key tool of monetary policy.
• Inflation: A general increase in prices and decrease in the purchasing value of money.
• Central Bank Independence: The degree to which a central bank can set monetary policy without political interference.
• Bundesbank: The central bank of West Germany, cited as a successful example of an independent central bank.
• Tariffs: Taxes on imported goods.

The Threat to Federal Reserve Independence

On July 16th, Wall Street experienced a significant market downturn, losing $200 billion in a matter of minutes, triggered by the suggestion that US President Donald Trump intended to fire Jerome Powell, the Chair of the Federal Reserve. Trump had reportedly drafted a letter to Powell stating, "You're fired," and had inquired of Republican lawmakers if he should proceed with the dismissal. This action, even as a suggestion, sent shockwaves through the equity markets, indicating a strong market preference for Powell and the Fed's current leadership.

President Trump, when questioned, confirmed he had discussed firing Powell, stating that "almost every one of them said I should." He criticized Powell's performance, calling him a "terrible Fed chief" who was "costing us a lot of money." However, Trump later announced he would not fire Powell, leading to an immediate market recovery.

The transcript highlights that Jerome Powell's term as Fed Chair is set to end in early 2026, raising concerns that Trump might appoint a successor who would align with his policy preferences, specifically lower interest rates. The financial markets, it is argued, are highly sensitive to any perceived interference with the Federal Reserve's decision-making on interest rates, emphasizing the importance of central bank independence.

Historical Context: The Evolution of Independent Central Banks

The video traces the historical development of independent central banks, contrasting the past with the present.

The Nixon Era and Political Interference

• Oval Office Tapes: The transcript references the Oval Office tape recording system, used by Presidents Lyndon Johnson and Richard Nixon. These recordings reveal the extent of presidential involvement in economic policy.
• Nixon and Arthur Burns: A key case study involves President Richard Nixon's interactions with Arthur Burns, the Fed Chair in the early 1970s. Nixon pressured Burns to keep interest rates low to aid his re-election campaign, despite Burns's concerns about rising inflation.
• "Independence within the government, not independence of the government": This quote from a former Fed chair illustrates the limited nature of central bank independence during that period. Nixon even threatened to control appointments to the Fed board to influence Burns.
• Consequences of Interference: Nixon's pressure led to delayed interest rate hikes, contributing to spiraling inflation in the 1970s, a period characterized by high inflation and subsequent high interest rates and recession across many developed nations.

The German Model: The Bundesbank

• West Germany's Success: In contrast to the widespread inflation of the 1970s, West Germany, through its central bank, the Bundesbank, managed to keep inflation under control.
• Genuine Independence: The Bundesbank was genuinely allowed to implement necessary measures to curb inflation without government intervention, even if those measures were unpopular. Otmar Eminger, head of the Bundesbank, emphasized their independence from the government while also serving as an advisor.
• "Courage to persist": Eminger noted that governments needed the courage to persist with policies of slow monetary growth, even when facing public pressure.
• "Anti-democratic" Nature: The Bundesbank's independence meant it made decisions based on expert opinion rather than accountability to voters or shareholders, a characteristic described as "anti-democratic" but effective in controlling inflation.

The Global Shift Towards Independence

• Following Germany's Lead: The chronic inflation of the 1970s and economic instability of the 1980s prompted other developed countries to adopt more independent central banking models.
• Bank of England and Reserve Bank of New Zealand: Examples include the Bank of England and the Reserve Bank of New Zealand, which were granted independence with specific mandates, such as keeping inflation below a certain percentage, with consequences for the governor if the target was missed.
• Accountability and Independence: The transcript notes that while governors are given independence, they are also held accountable for outcomes, with dismissal as a potential consequence of failing to control inflation.

The Impact of Independent Central Banks

The shift towards independent central banks has had significant economic consequences:

• Positive Outcomes: For many developed countries, this independence has led to periods of low inflation and low interest rates throughout the 1990s, 2000s, and 2010s. This has been beneficial for GDP growth and stock market performance.
• Concerns about Inequality: However, critics argue that this model has also contributed to rising inequality and a housing crisis, as certain segments of the population have been priced out of the market. Central bankers, in turn, point to fiscal policy as the tool to address these issues.
• Market Confidence: Financial markets generally favor central bank independence, as it reduces the risk of politically motivated monetary policy decisions.

The Turkish Experiment: A Cautionary Tale

• Erdogan's Intervention: Turkey's experience under President Recep Tayyip Erdoğan is presented as a cautionary tale. Erdoğan repeatedly fired central bank governors who advocated for raising interest rates and appointed those who favored lowering them.
• Consequences: This intervention led to rampant inflation, with Turkey's official inflation rate reaching nearly 80% in the preceding month, the highest in 24 years. The economy has stagnated, unemployment has risen, and the cost of living and housing crisis have worsened.

The Current US Situation and Future Concerns

• Trump's Policies: Donald Trump's current policy approach is described as a "dangerous combination." He is increasing government spending, imposing tariffs on imported goods (which he claims will combat inflation, contrary to conventional economic wisdom), and demanding that the Federal Reserve cut interest rates.
• Pressure on the Fed: Trump has consistently pressured the Federal Reserve to lower interest rates, arguing that the US should have the lowest rates globally.
• Legal Challenges: Trump has faced legal challenges in his attempts to fire Fed Chair Jerome Powell and a board member, Lisa Cook.
• Future Appointments: With Powell's term ending in May 2026, Trump has stated his intention to appoint a successor who is committed to cutting interest rates.
• Voter Concerns: The transcript concludes by posing a question to the audience about how they should feel about these developments. It acknowledges that while independent central banks have delivered economic growth, they have also contributed to inequality and housing crises. For voters who have struggled with the cost of living, Trump's focus on reducing prices is appealing. However, the video warns that tinkering with an organization designed to control inflation could have detrimental consequences.

Conclusion

The video argues that the independence of central banks, particularly the Federal Reserve, is crucial for maintaining economic stability and controlling inflation. The historical examples of Nixon's interference and the success of the Bundesbank highlight the dangers of political pressure on monetary policy and the benefits of a truly independent central bank. The current situation with President Trump's pressure on the Federal Reserve and his stated intentions for future appointments raises significant concerns for financial markets and the broader economy, with the Turkish experience serving as a stark warning of the potential consequences of undermining central bank independence.