Mark Spindel, chief investment officer at Potomac River Capital, has been making the case for an independent Federal Reserve. He makes this point especially loud at a time of mounting economic extremes. His co-authored book, “The Myth of Independence: How Congress Governs the Federal Reserve,” explores the challenges facing the central bank in maintaining autonomy from political influence. The debate over the Federal Reserve’s role has certainly intensified. This flood of interest follows former President Donald Trump’s urging just last week that the U.S. should lower interest rates to reduce debt-service payments.
Additionally, Trump claims that reducing the rates can save “trillions of dollars in interest cost.” This perspective lends color to his increasingly visible alarm about the national debt. As we’ve reported, experts caution that a low-rate environment would bring on prolonged inflation fueled by surging consumer demand. This situation is reminiscent of history when political pressure influenced monetary policy. A particularly bad example for this is 1972, when President Richard Nixon pressured Fed Chair Arthur Burns to cut rates ahead of the re-election to get the economy humming again.
Today’s debate over the Federal Reserve couldn’t get more important. With Jerome Powell’s term as chair expiring in May, this issue is generating lots of chatter. Nominated by Trump in 2017 and re-nominated by President Biden to a second term, Powell’s leadership has come under attack. Trump has openly berated Powell for the central bank’s $2.5 billion building renovation project, saying he was unhappy with its focus on priorities.
“We have a man who just refuses to lower the Fed rate.” – President Donald Trump
Trump has publicly lambasted Powell and threatened to remove him. Only a week or so later, he moved the goalposts and called those plans “highly unlikely.” This kind of political rhetoric raises troubling questions regarding the Fed’s independence. It calls into serious question whether the Fed can truly operate without outside political pressure.
At least three head CEOs from our nation’s largest banks have made their concerns known. It’s because they understand the urgent case for a central bank to be insulated from crass political meddling. JPMorgan Chase CEO Jamie Dimon emphasized, “I think the independence of the Fed is absolutely critical.” Former Federal Reserve Vice Chairman Alan Blinder expresses this feeling pretty well. As he warns, too much coupling of monetary policy to political expediency is a pernicious thing.
“There’s temptation to give the economy juice in the short run.” – Alan Blinder
Blinder further remarked, “It’s by now widely agreed, almost all over the world: If you leave monetary policy in political hands, you’ll get too much inflation.” Such warnings ring especially true given today’s economic climate, where inflationary pressures are an ever-present threat.
In a time when economic growth and inflation seem to be eclipsing all other issues in our national discourse, Spindel makes an intriguing parallel. He likens the approach to keeping a healthy diet. He stated, “If you’re just eating dessert all the time, you really do have to take your vegetables.” His analogy highlights the importance of caution in monetary policy, focusing on long-term stability rather than short-term profits.
The Federal Reserve’s recent history is a fascinating story of the blurred lines between political chess and economic warfare. During the last period of high inflation, in 1981, the central bank made a dramatic move by increasing interest rates to 20% to address the problem. Such measures further illustrate the tightrope walk that needs to be balanced between spurring economic growth and quelling inflation.
As Powell nears a crossroads on his current term as Chairman, the debates over the Fed’s independence are more important than ever. Home political actors, such as President Trump, may seek to push the boundaries of this independence. What they do, or don’t do, will likely affect what the central bank decides in future meetings.
