WASHINGTON–With President Trump regularly criticizing Federal Reserve Chairman Jerome Powell and the Fed for not lowering rates and threatening to fire him as a result, a new analysis offers a historical look at what has happened in the past when the central bank’s independence has been threatened.
The analysis, conducted by the Wall Street Journal, comes at the same time the publication reported “Investors sent a warning…that central-bank independence matters to Wall Street.”
“The markets see the prospect of higher inflation if a new Fed regime were to cut rates in line with Trump’s wishes,” the Journal reported. “Some analysts say there would be global consequences, because Treasurys and the dollar underpin financial markets worldwide.”
‘Highly Unlikely,’ But…
Earlier this week Trump said it was “highly unlikely” he would fire Powell, although he did add, “Unless he has to leave for fraud.”
The reference was to an effort by White House advisers to target renovations at Fed properties that have cost more than planned.
“Past examples of tension between heads of government and their central bankers offer clues about how the Trump-Powell showdown could play out,” the Journal stated. “Politicians usually want lower rates, mindful of consumer and business borrowing costs. Central bankers need to promote stable prices.”
The report explained that the modern concept of Fed independence goes back to 1951 when the central bank was given a freer hand by Treasury to set interest rates as it saw fit.
LBJ Does Some Yelling
But other presidents have also pressured the Fed, including President Lyndon Johnson, who urged Fed leader William McChesney Martin Jr. to keep rates low while he pursued his broad social-spending agenda, the Journal said.
When Martin cast the deciding vote to raise rates, he was summoned days later to Johnson’s Texas ranch, where the president reportedly yelled at him, the report stated.
Johnson’s successor, President Richard Nixon, also had differences with his Fed chair, Arthur Burns, “who was known as an inflation fighter.” But the Journal cited historians who said Burns became overly preoccupied with currying favor with the president, who desperately wanted to hold rates low ahead of his 1972 re-election campaign, despite growing inflation.
More From the Nixon Tapes
“Evidence from the Nixon tapes clearly reveals that President Nixon pressured Burns, both directly and indirectly…to engage in expansionary monetary policies prior to the 1972 election,” researchers wrote in a 2006 paper in the Journal of Economic Perspectives, the Journal reported.
