What Trump and Powell’s Tiff Shows About the Core of the Fed

Trump has repeatedly pressured Powell to lower interest rates, thinking that a spiral of Keynesian growth can undo the damage he has wrought with tariffs and one of the most hands on governments economically in recent memory. Let alone the theoretical weakness of Trump’s stands, he is viewing the Fed in an unprecedented yet still partially realistic way. His belief that he can manipulate the Fed is one that many other presidents have had without spelling it out publicly. Regardless of Trump and Powell’s respective beliefs, their fight brings into question the institutional structure behind the Fed and the reasons for the Fed’s existence. Trump and Powell’s argument reveals the vulnerable fantasy that the Fed is truly independent. Their argument also clearly demonstrates why fiat currency is a servant of those who make it. Finally, their argument shows the negative effects of letting government, inherently ruled by human ambition, into an area of life as central as money. 

As poorly informed it is that Trump is pushing for artificially lower interest rates, it makes it simple to see that the Fed’s interest rate choices are merely value-based decisions informed by analytical economic concepts. Even if it wasn’t Trump, Powell still has an opinion that he ultimately gets to act upon. While Powell might not act according to Trump‘s bidding, any of the other members of the board of governors could easily have someone in power that influences them. Even if all of their motivations were 100% pure, it would still be impossible for them to agree, let alone fulfill their two goals of low unemployment and a stable money supply. Anyone who refers to the Fed as independent has a problem of definition. They would only be correct if they mean it’s independent from the most direct and daily control enforced by Congress. In every other sense, the Fed is no more independent than a nonprofit or typical business, but with a far more murky incentive structure. While the Fed governors are not given a direct financial incentive, their exit opportunities are directly determined by their votes within the Fed. Trump’s pressure upon Powell is just a very public example of the sort of pressure that Fed governors already face on a daily basis. …