Donald Trump’s war with Jerome Powell and the Fed is far from over

As a temporary distraction of the history of Jeffrey Epstein, Donald Trump’s visit last week at the headquarters of the Federal Reserve, an independent institution whose previous presidents remained away, served its objective. Images of Trump and Jerome Powell, the president of the Fed, carrying white helmets and competing for construction costs when they were aiming for the site, which is renovated, quickly went to social networks and the original pages of the main press organizations. For the president, however, the visit also concerned something more substantial: continuing his long pressure campaign on Powell, who looked a little uncomfortable while he was traveling Trump through rooms that had been removed from their walls and beams.

Since he took office for the second time in January, Trump repeatedly criticized Powell, which he appointed in 2017, and his agency for not having reduced interest rates fairly quickly. “Numbskull”, “Moron” and “M. Late ”are some of the epithets he has used. So far, Trump has prevented trying to dismiss Powell, whose term takes place until next May. But, by attacking him verbally and demanding political changes, he follows the game book of other populist authorities, notably Viktor Orbán of Hungary and Turkey Tayyip Erdoğan. In 2018, Erdoğan published a presidential decree giving him the power to reject the governor of the Turkish Central Bank. Between 2019 and 2024, he forced four governors who had rubbed his requests for low interest rates, regardless of arrow inflation. The reasons why strong men compete with central bank leaders are not difficult to discern: they often come to power promising to improve the means of subsistence of their supporters by stimulating employment and by reducing the cost of living. But an independent central bank refuses them to control a key tool to quickly stimulate the economy – the ability to reduce interest rates. In addition, for any self -respecting man who respects himself, the very concept of an independent electricity center is offensive, in particular that which is expressly designed to withdraw key political decisions in the political domain. The conflict is practically guaranteed.

Shortly before Trump’s meeting with Powell, I spoke with Selva Demiralp, professor of economics at the University of Koç, Turkey, who worked at the Fed between 2000 and 2005 after obtaining his doctorate. At the University of California, Davis. She recently co-wrote a cross-country study that showed how financial markets have often reacted negatively to populist leaders exerting pressure on central banks. This was the case in Turkey, where Erdoğan’s determination to have low interest rates led to the country’s capital flight, a collapse of the value of money, higher inflation and a prolonged period of slow economic growth that certain economists have characterized as a depression. The American economy is much stronger than the Turkish economy in 2018, and the dollar is a much more sought -after currency than the Turkish Lira. Nevertheless, Demiralp said that she saw parallels between Trump and Erdoğan, who finally gave up and brought more independent central bankers.

“In all these countries where there are populist pressures, which really matters is if you have solid institutions or not,” she said. Since 1951, when the Treasury Department and the Fed have concluded an agreement which has enabled the central bank to fix interest rates independently, the presidents have generally respected this autonomy, although some of them, in particular Richard Nixon, have relied in private on the federal chairs to reduce interest rates or keep them low. What distinguishes Trump is the intensity and transparency of his pressure campaign and his personal attacks. During his first mandate, although he recently named Powell, Trump criticized him several times, calling him without any idea and claiming that the Fed represented a more important threat to the American economy than China. Indeed, Demiralp and his co-authors found that Trump had reprimanded the central bank more frequently than Erdoğan. “But in the markets, the reaction was much less obvious,” she noted. “The markets essentially supposed that the Fed was not going to give in.”

This hypothesis was well founded. Even so, since Trump took office for the second time and began to consolidate his control over the entire federal government – including supposedly independent agencies – Fed autonomy was again questioned. At Wall Street, many people have found the comfort of the conviction that Trump would not take any measures that would seriously fold the markets, such as Powell dismissal. They also know that, even if he was trying to provoke a dismissal, he would probably encounter decides of the courts. In May, the conservative majority of the Supreme Court said that the president had the power to withdraw the so-called independent agency heads, but that he also wanted to say that the scope of the president’s dismissal power does not necessarily extend to the head of the Fed and his colleagues decision-makers, who can only be dismissed “for the cause”. This was largely interpreted as the judges telling Trump to retreat from his efforts to oust Powell.

Trump and his allies did not give in – instead, they looked for a legal avenue to reject the Fed chair which could possibly pass the high court. They went to its management of the costly renovation of the Fed headquarters, which was built during the Great Depression, and another building on the other side of the street in the district of the Mistworm. Last week, representative Anna Paulina Luna, a Florida Republican, called on the Ministry of Justice to continue Powell for allegedly lied to the renovation congress, the cost of which increased from 1.9 billion to 2.5 billion dollars. It is fair to wonder if the project could have been carried out at a lower cost, but Trump and the Republicans are far from acting in good faith: they are there for Tar Powell and the Fed, which indicates on his website that excess costs were a product of design changes; climbing prices of materials, equipment and labor; And other unexpected problems, including asbestos and toxic soils.

Last week, Trump was happy to take the opportunity to publicly bait the president of the Fed, becoming the first president to visit the headquarters of the Central Bank for something other than an official ceremony. But he seems to have abandoned the prospect of getting rid of Powell before the end of his mandate, at least for the moment. After finishing the tour, Trump told journalists that dismissing him would be “a big step” and was not necessary anyway. Having used his release in the field to press his file for lower interest rates, he said he thought Powell “was going to do the right thing”.

Trump often changes his mind, of course: barely a few weeks ago, he would have shown some Republicans of the room the project of a letter pulling Powell. (Trump then denied having planned to reject him.) The first opportunity for the president to return to attack mode will come on Wednesday, when the next Fed political meeting ends. He called for interest rates as low as a percent. Powell and his colleagues are likely to announce that they have maintained their reference rate from 4.25 to 4.5%. Inflation is always higher than the FED objective of 2% and, in certain parts of the economy, Trump prices are starting to increase prices.

Assuming Trump prevents trying to reject Powell, he will soon have the opportunity to install a more flexible replacement, which would take over after the end of Powell’s mandate. But the president of the Fed does not set interest rates alone: a political committee of twelve members determines them by majority vote. For at least for a while, most of the committee members will always be officials that Trump has not appointed, and they seem unlikely to curl easily. “I am a former FED economist, and I know that the Fed would fight to protect its political space,” said Demiralp. At the same time, she added: “I think Trump will continue his pressure campaign.”