A friend of mine spent $2.5 million remodeling his $1 million home, when he could have just bought a new home that was much better than his remodeled home for only $1.5 million (and saved $2 million).
Even worse, he could have easily gotten his remodel done for under $1 million.
When I explained to my friend that he was stupid, he tried to raise my interest rates!
This is an illustration of what Trump might use to bring down Fed Chair Powell, as the Fed is spending $2.5 billion to renovate a $1 billion building.
The Fed was established in 1913 to foster monetary stability. It consists of a board of governors in Washington and 2 regional Federal Reserve Banks across the U.S. It is owned by its member commercial banks, and it is supposed to be independent, despite being partially set up by Congress.
The Fed has the power to buy and sell securities, regulate banks, and raise short-term interest rates, among other things, but it is only partially “independent.” And I dearly hope it remains that way.
Brent Johnson posted this short podcast on Sunday – Trump’s Secret Plan to Take Over the Federal Reserve – in which he discussed Fed independence.
He pointed out that the Fed was established by Congress, the Fed has to testify before Congress twice per year, and the Fed has to transfer it’s profits to the Treasury – making it less “independent” than people might think.
Further, Presidents have been pressuring the Fed from the get-go. Truman famously pressured the Fed to cut rates, and lost.
LBJ physically pressured a Fed Chair (threw him against a wall), and got him to lower rates. Nixon pressured the Fed and it acquiesced only to see inflation surge.
Bush famously pressured Greenspan to lower rates too, and blamed his election loss to Clinton on Greenspan because Greenspan would not lower rates.
And most recently, Mr. Trump has gone off the rails with his pressure on Fed Chair Powell.
Why Trump’s So Mad at Powell
Mr. Trump is very upset because Powell lowered rates for Biden, but he won’t now despite a clearly softer labor market, lower personal savings rates, higher default rates, and cooler inflation.
Mr. Trump believes a lower Fed Funds Rate will both stimulate the economy AND save the government hundreds of billions in interest.
Why the Fed’s Resistance Is a Good Thing
The Fed is again resisting political pressure, and Johnson (no Fed lover by any means) points out that its ability to do so (to have some independence) is a very good thing.
This is because most Presidents seem to think that lower rates are a panacea that will spark economic booms (and re-elections).
But, as we’ve seen across the world time and again, whenever central banks are not independent, the economies they oversee collapse under inflation (from excessively low rates and money printing).
Two Huge Myths About the Fed and Low Rates
There are two myths that most of our Presidents seem to believe:
- That the Fed can control long-term rates (it can’t; see Fall of 2024 as an example).
- That low, short-term rates foster economic booms. They often foster asset bubbles that pop like we saw in 2000 with the dotcom bust or in 2008 with the housing bust, they foster inflation, or they are just a result of economic cycles that would have lowered rates no matter what the Fed did. Remember too that the economy boomed under very high rates in the 1980s.
Steve Forbes makes a strong case that Powell is now being political and that he should lower rates in this five-minute podcast – Trump’s War Against The Fed Isn’t Historic – and I agree with Mr. Forbes. But, I’m also glad that Powell has the power to push back.
