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Key Takeaways
- Several members of the Federal Reserve’s policy committee have spoken out against the White House’s campaign to pressure the Fed to cut interest rates.
- Fed officials broke their customary taboo against commenting on political controversies after the Justice Department subpoenaed the Fed in an investigation of Chair Jerome Powell.
- The Trump Administration’s hardball tactics could backfire, leading Fed officials to keep interest rates higher for longer to demonstrate the Fed’s independence from White House control.
If the Trump Administration’s investigation into Federal Reserve Chair Jerome Powell was intended to intimidate the central bank into sharply cutting interest rates, it’s not going as planned.
At least four Fed officials who set interest rates spoke out this week in defense of Powell and the Fed’s duty to make monetary policy decisions in the public interest rather than at the White House’s command. Traders subsequently priced in lower chances of rate cuts early in the year.
Trump’s Justice Department issued a subpoena to the Fed last week, seeking information about Powell’s June 2020 Senate testimony in regard to the ongoing renovation of the Fed’s headquarters. Powell denied wrongdoing and said the criminal investigation was part of Trump’s long-running campaign to pressure the Fed to sharply cut its benchmark interest rate, which influences borrowing costs across many types of loans. Trump has denied knowing about the probe before the subpoena went out.
What This Means For The Economy
The eruption of the long-simmering feud between Trump and Powell complicates the Fed’s dual mandate to keep inflation low and employment high, adding another consideration to the already challenging economic environment.
Several Federal Reserve governors and regional bank presidents backed up Powell’s interpretation of events this week and said the Fed’s independence from White House control is essential to its mission of keeping a lid on inflation using monetary policy. The outspoken comments were unusual because Fed officials usually make a point of avoiding commenting on political controversies.
The pushback could have implications for interest rates: experts have speculated that Fed officials could be more reluctant to lower the fed funds rate in the coming year if they feel inordinately pressured by the Trump administration to do so. Policymakers may decide that keeping interest rates higher for longer could signal the Fed’s willingness to use monetary policy to fight inflation and bolster public confidence that the Fed will do what it takes to keep inflation under control despite political coercion.
“Any place where you don’t have central bank independence, inflation comes roaring back,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago, in an interview on NPR Wednesday. “We’ve spent the last five years fighting to get the inflation rate down, and that hasn’t been easy. And if you’re attacking the independence of the Fed, that makes that problem worse.”
Traders were pricing in less of a chance of a rate in the January, March, April and June meetings on Thursday than they did the same time last week, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
For example, traders were pricing in a 78% chance that the Fed would keep rates steady at its March meeting on Thursday. That’s up significantly from 58% penciled in at the same time last week—before news broke about the investigation.
Neel Kashkari, president of the Minneapolis Fed, and Fed governor Michael S. Barr made comments similar to Goolsbee’s in media appearances this week. John C. Williams, president of the New York Fed, said in a speech that Powell “has proven himself to be a man of impeccable integrity.”
In contrast, Fed Governor Stephen Miran dismissed concerns about the Fed’s independence as “noise,” speaking at an economic conference in Greece. Trump appointed Miran to the Fed governorship this fall. Miran currently serves as an economic advisor to Trump, although he has taken leave from that position while on the Fed’s policy committee.
