Trumpian criticism of Fed policy

In Trump's world, there is no Taylor rule or anything like it; there is just the demand for lower rates when he thinks it will benefit him

- JEFFREY FRANKEL

US PRESIDENT DONALD Trump has lately been heaping abuse on Federal Reserve Chair Jerome Powell—not least over the supposedly mismanaged renovation of the Fed's headquarters—and even drafted a letter sacking Powell, whose term runs until May 2026. In Trump's view, Powell should force interest rates down by 300 basis points—or let someone else do it. Is there any logic behind Trump's demands?

To answer this question, it is revealing to look statistically at what determines whether Trump criticizes the Fed for interest rates that are too high versus too low.

The pressure Trump is putting on the Fed is fundamentally misguided. Perhaps the most important insight from the last half-century of monetary economics is that central banks under direct government control tend to abuse their power. Since political authorities cannot resist the temptation to stimulate the economy, putting them in charge of monetary policy results in an inflationary bias. And because everyone knows this ahead of time, monetary expansion merely validates inflation expectations, without boosting real growth.

A central bank that is shielded from political pressure can achieve better price stability and economic performance. For this reason, most major countries have given independence to their central banks. In the US, the Federal Reserve Act of 1913 prohibits the President from removing the central bank's chair without cause. Even the Fed's right to make its own arrangements regarding its headquarters building is protected. Most US administrations have scrupulously respected these rules, and the principle behind them.