Tensions are rising around the leadership of the Federal Reserve. For months, President Trump has urged its chairman, Jerome Powell, to step down. He has now added pressure on the central bank by usurping the power to fire one of its board members.
If Trump’s pressure does not relent, the consequences could be substantial for the American economy—and, by extension, for Europe as well.
Powell, whose term as chairman of the Federal Reserve ends in May next year, has remained unfazed by the headwinds from the White House. With repeated demands that the Fed cut its policy-setting funds rate, the president has put the very independence of the central bank at risk.
So far, Chairman Powell has resisted Trump’s ultimatum: cut rates or resign. The question is how long this resistance can last, now that Trump has added pressure by targeting another Fed board member. Reports the Wall Street Journal:
President Trump said he is removing Lisa Cook, a Joe Biden-appointed Federal Reserve governor, citing allegations that Cook submitted fraudulent information on mortgage applications. “I have determined that there is sufficient cause to remove you from your position,” Trump wrote in a letter to Cook posted on social media on Monday night.
This has created a unique situation, one that could forever change the independent status of the Federal Reserve. No board member has ever been terminated from his or her position before; reasonably, if that were to happen, it would have to be through a process that is a mirror image of the appointment process.
A board member is selected through a two-step process: first the president picks the candidate, then the U.S. Senate has an up-or-down vote on the candidate. If, and only if, the Senate approves a candidate, can he join the Federal Reserve Board of Governors. Therefore, it stands to reason—and to U.S. constitutional logic—that a board member can only be fired by the Senate.
The process would not be unlike the one that exists for justices on the U.S. Supreme Court: the president picks a candidate, whom the Senate either approves or disapproves of. A justice can only be removed from the Supreme Court (where appointments are for life) by an impeachment process, which would involve both the House of Representatives and the Senate.
Since the board of the Federal Reserve does not lead a branch of government—the Fed is simply an independent agency that formally belongs to the executive branch—it would not have to take a full-fledged impeachment process to terminate a board member. A simple reversal of the appointment process is sufficient to maintain the Fed’s independence.
From an economic and general political perspective, that very independence is what matters. Previous presidents have had no problem respecting the central bank’s status; perhaps the best example is President Clinton, who made it his explicit policy throughout his eight years in office to never comment on anything the Federal Reserve did.
Central bank independence is important, even essential, to a nation’s economic stability. There are plenty of examples of how central banks without that status have been misused, even abused, by their governments: the most pointed examples in recent history are Venezuela and Turkey, two countries where the central bank has simply been reduced to a money-printing office for the government.
The results have been catastrophic, with extreme inflation and unending economic instability.
Let me make it clear that I am not mentioning these examples to project some kind of economic implosion into America’s short-term economic future. A nation does not fall into the Venezuelan disaster dungeon in short order; it takes years of persistent and highly deliberate mismanagement of the economy to make that happen.
What is worrying, though, is that once President Trump has established his right to terminate Federal Reserve board members, he will have removed the one safety mechanism that prevents a disaster of hyperinflationary proportions. He does not have to be the one who uses his newfound power over the central bank to make them print inordinate amounts of money, but as I explained back in July, we also cannot be sure he won’t play that role.
On the contrary, as level-headed as Trump is in most of what he does, his attitude to the Federal Reserve actually makes him a viable candidate for a catastrophic shift in U.S. monetary policy. Here is how I put it back in May last year, when Trump was floating the idea of abolishing the Federal Reserve:
If the Trump campaign’s idea for ending the Federal Reserve had gone into effect in 2017; and If Trump had been elected to a second term … By the end of 2023, the U.S. economy would have had an annual inflation rate of more than 1,000%.
An outrageous figure, no doubt, but I backed it up with a careful analysis of the relationship between monetary expansion, monetization of government debt, and inflation.
If President Trump comes out on top in his fight over who can and cannot fire Federal Reserve board members, the practical effect will be the abolishment of the central bank—in other words, the scenario I analyzed when I reached the 1,000% inflation figure. It does not represent the most likely scenario in a non-Fed world, but it does represent a possible scenario.
It is important to note here that even in lieu of this ‘possible’ and quite calamitous scenario, the American economy can still suffer serious damage from Trump’s anti-Fed campaign. If he, having emerged victorious over the Federal Reserve, strongarms the central bank into printing just a fraction of the money needed for the 1,000% scenario, he can still cause inflation in the 20-30% range. All it takes is just a little bit more monetary recklessness than what the Fed, pushed into it by Congress, did during the 2020 pandemic.
Should this happen, the consequences would be very serious, not only for the United States but for Europe as well. In part 2 of this article, I will elaborate on exactly what Europe should expect if Trump prevails in his attempts to usurp power over the Federal Reserve.
