The comments of Federal Reserve President Jerome Powell in Jackson Hole, suggesting the possibility of an imminent cut in interest rates, should have sounded music for President Donald Trump’s ears.
However, days after Powell gave one of the most important speeches on the financial calendar, the Fed President was digesting the news of the last turn in a latent battle between the Central Bank and the Trump administration, when the US president said he was.
The first attempt to dismiss a Fed governor, coupled with Trump’s public criticism of Powell, represents, who has been 111 years old, has not seen since the Nixon government.
Investors speculate on how far Trump can go, which can result from a subsequent judicial battle and the impact of it on the US markets, and debt.
A White House spokesman said to CNN International that economic data show that Trump’s policies have reduced inflation.
“The president made it clear that it is time for the Fed to respond to this objective fact by cutting the fees, offering the necessary relief in interest rates to American families and supporting employment and economic growth,” the spokesman said.
Trump’s motivations to try to influence the Fed – a more favorable interest rate environment that encourages spending and GDP growth – are not new, as well as the likely consequences if he gets what he wants.
“It is very important that Americans understand how dangerous this is,” said former Fed President and former treasure secretary Janet Yellen, Jake Tapper, from CNN Intyernacionalon Thursday.
Türkiye
Turkish President Recep Tayyip Erdogan offers an example of authoritarian leaders trying to intervene in monetary policy. Erdogan’s unconventional view that the way to control inflation was to reduce interest rates unpromped to a spiral inflation and, finally, to the collapse of the Turkish Lira.
In the space of 20 months, between July 2019 and March 2021, Erdogan fired Murat Cetinkaya, Murat Uysal and Naci AgBal of the Central Bank of Turkey’s heads of heads.
“Since 2018, whenever a Central Bank governor has decided to increase interest rates or keep them longer than Erdogan wanted, Erdogan basically fadfulness,” Adam Michalski, researcher at the Center for Oriental Studies, told the East Study, to CNN International.
At the time of the resignation of AgBal, in March 2021, the inflation rate in Türkiye was 16.7%. In October 2022, the rate reached the peak of 85.5%. These price increases precipitated repeated cuts in Turkey’s basic interest rate, which fell to a minimum of 8.5% in February 2023.
The Turkish Lira was sustained for much of this turbulence by the use of foreign currency reserves, which placed Turkey on the verge of a debt crisis. The country spent about $ 60 billion trying to support the lyre.
Public frustration with inflation forced Erdogan to adopt a more conventional monetary policy by 2023. Turkey increased interest rates for a 50% peak in March 2024, and currently they are around 43%. Mortgage rates for Turkish houses are now over 40%.
The removal of lira support caused the currency to plummet, further pressing prices.
But that does not mean that Erdogan has stopped interfering with the Central Bank.
“This is still an Erdogan political decision,” says Michalski. “You never know when Erdogan will decide, ‘The economy is sufficiently stabilized, let’s get back to that controversial policy of low interest rates.”
Although increasing inflation, coin devaluation and high interest rates have affected Turkish companies and their ability to do business abroad, the poorest were the most affected.
About 9 million Turkish workers earn the minimum wage of 22,104 net try per month, the equivalent of about $ 538.
“For them, life has not improved in the last decade,” said Michalski.
Argentina
Argentina had a similar experience, said Hans-Dieter Holtzmann, project director at the Friedrich Naumann Foundation.
“In the end, it depends on who the Argentine president is, what is his priority and his main economic interest,” Holtzmann told CNN International.
In fact, the presidents of the are traditionally devoid of their positions after a presidential election in Argentina. As a result, since 2013, the BCRA has had eight presidents. In the same period, the United States had three.
For much of the 21st century, the BCRA acted to support the financial objectives of the Argentine government, which consisted largely in financing a deficit.
The Central Bank printed money to finance Argentina’s deficit, leading to hyperinflation that reached the 292% peak in April 2024.
Since Javier Milei was elected in 2023, the Argentine president has postponed the electoral promise to close the Central Bank and, instead, supported the BCRA price stability goal.
“Milei noticed immediately that the Central Bank’s independence is critical to preserving not only monetary stability, but also the stability of currency,” said Davide Romelli, an associate professor at the Trinity College Dublin Department of Economics, which monitors independence levels in 155 central banks.
The focus on price stability, along with austerity and monetary reform, was remarkably effective. Inflation fell to 36.6% in July. In the same month, Moody’s raised Argentina’s credit rating, increasing investors’ trust in maintaining public debt.
Holtzmann took clear lessons from the disturbance in Argentina.
“It is a lesson that can be learned from Argentina: if there is no clear way for the Central Bank to analyze and combat inflation, reputation [de um país] It can be quickly destroyed, which can lead to a descending spiral. Then the country risk increases and suddenly you no longer have access to the capital market. ”
The US of the 70s
The Fed has already dealt with threats to its independence in the past, but nothing at the level of Türkiye and Argentina.
In 1970, President Richard Nixon dismissed Fed President William McCchesney Martin in place of the Republican and former presidential counselor Arthur Burns.
Burns and the Fed expanded monetary supply in the US economy in an election year after a recession in the Lyndon B. Johnson government. There is no definitive evidence that Burns was involved in monetary expansion at the command of Nixon, but the macroeconomic consequences of this policy are clearer.
“Regardless of the final source of Arthur Burns’s motivation, his actions as president of the Federal Reserve helped trigger an extremely costly inflation and retraction cycle,” wrote Burton A. Abrams, an emeritus professor at the University of Delaware in 2006.
Inflation rose from 3.3% in 1971 to 11.8% in 1974. Opep oil supply cuts, the removal of government and pricing government controls, and global food supply shocks are all responsible for the guilt.
However, “there is much evidence that high inflation of the 1970s was partly due to the fact that Burns has never acted so strongly in the tightening of monetary policy,” said Romelli of Trinity College.
What if the Fed loses its independence?
Investors are not yet convinced that Trump will be in danger of dismissing Powell before the end of his term on May 15 next year.
Romelli said he believed that what will “completely change the rule of the game” would be if Trump decided to lay off Cook even if a judge acquitted it from the accusation of fraud. A JPMorgan note on Tuesday stated that Cook’s successful dismissal could also leave other governors vulnerable to dismissal.
“What we know about the literature is that every time there is perceived pressure or a reduction in the degree of independence of the Central Bank in a country, usually expectations about inflation increase and thus families and analysts predict a higher future inflation, which can have a harmful effect,” said Romelli.
A White House spokesman said to CNN International that Trump determined that there was reason to remove a governor who “was accused of believing in financial documents from a highly sensitive position in the supervision of financial institutions.
“The removal of a governor for just cause improves the responsibility and credibility of the Federal Council reserve for both markets and the American people.”
George Saravelos, Global Deutsche Bank’s Global Code of Exchange Research, said he believes that if a 1970s repetition happens in the United States, the consequences will be much worse.
The United States is spending more than lending and importing more than exports, which is known as double deficit, while they owe more than they have abroad. Foreign investors also hold huge amounts of US assets, which could be encouraged to sell during periods of economic crisis.
“All these ingredients advocate a significantly greater global break,” Saravelos wrote in a August note.
The Fed has the advantage of being a historically stable institution, sustaining investors’ confidence even in recent disturbances. The legal safeguards of the Fed, granted by the Federal Reserve Law of 1913, give it much more protection than the central banks of Argentina and Turkey.
Concrete changes in investors’ perception of Fed independence, however, can still cause serious damage.
This is already starting to happen. Carola Binder, an associate professor of economics at the University of Texas in Austin, sees politics influencing Fed coverage with much more strength than in the past.
If they cut 25 base points instead of 50, people will say, “Ah, they were doing it to go against Trump.” On the other hand, if they decide that they need to cut 50 points, because the data indicate, some people will say, “Ah, they were giving in to the president’s pressure.”
“In some ways, this puts them in a dead end, because everything they do, even if it is based on data, will be seen as a political decision,” Binder told the CNN International.
The other risk is that Trump’s actions inspire populist leaders elsewhere.
Reuters reported comments from several central bankers who fear that the reduction in the independence of central banks in the United States causes similar measures elsewhere, a development that would cause great damage to the global economy.
“It is not clear that we would become obviously and imminently another Türkiye,” said Binder. “But I think […] It’s easy for people to be suspicious of the Fed, and much harder for them to recover that confidence. ”
