The Powell Precedent: How Political Interference Could Remake the Federal Reserve
A staggering 8.2% – that’s the overall rise in real median household income during Donald Trump’s first term, a figure voters remembered even when assessing the economy under Joe Biden. This wasn’t accidental. It was, in large part, a consequence of a delicate economic balance orchestrated by Jerome Powell, and the subsequent political fallout reveals a dangerous trend: the erosion of Federal Reserve independence. The treatment of Powell, both by Trump and, subtly, by Biden, isn’t just a story of personal animosity; it’s a warning sign about the future of monetary policy and the potential for politically motivated economic manipulation.
The Unlikely Architect of Trump’s Economic Boom
It’s a paradox often overlooked. While Trump routinely attacked Powell, blaming him for any economic headwind, the former Fed chair arguably laid the groundwork for the strongest economic performance of Trump’s presidency. Inheriting a low-interest-rate environment established by Ben Bernanke after the 2008 financial crisis, Powell cautiously raised rates, curbing inflation while allowing for sustained growth. This resulted in a 3% economic growth rate in 2018 – the highest in over a decade – and significant wage gains. Crucially, Powell resisted Trump’s relentless pressure to maintain ultra-low rates, a decision that prevented a potentially damaging inflationary spiral.
This resistance, however, came at a cost. Trump didn’t just criticize Powell; he openly mused about firing him and even reportedly explored the legality of doing so. The Department of Justice’s subsequent investigation into Powell, however spurious, underscores a disturbing pattern of weaponizing government institutions against perceived enemies – a hallmark of what Jonathan Chait aptly terms “banana republicanism.”
Biden’s Soft Pressure and the Inflation Miscalculation
The dynamic shifted under the Biden administration, but not entirely for the better. While lacking Trump’s overt hostility, the Biden White House exerted “soft pressure” on the Fed to avoid hindering the economic recovery following the COVID-19 pandemic. Both administrations engaged in significant deficit spending – Trump with tax cuts, Biden with large-scale stimulus packages – adding fuel to inflationary pressures.
A critical miscalculation by both Powell and the White House was treating the COVID recession as analogous to the 2008 financial crisis. Unlike 2008, where asset values were underwater and a prolonged stimulus was necessary, the COVID recession was largely resolved once lockdowns lifted. Powell’s decision to maintain near-zero interest rates for over two years, until June 2022, allowed inflation to surge to a 40-year high of 9.1%.
The Income Gap: A Telling Tale
The stark contrast in economic outcomes is reflected in real median household income. While it rose 8.2% overall under Trump, it only increased 2.6% under Biden. This isn’t simply a matter of economic policy; it’s a matter of perception. Voters, even if unable to articulate the specifics, remember how their wallets felt. This perception played a significant role in Trump’s political resurgence, fueled by the narrative of a stronger economy under his leadership.
The Risk of Politicizing Monetary Policy
Trump’s attacks on Powell and the Bureau of Labor Statistics (BLS) – the agency responsible for collecting crucial economic data – are deeply concerning. Undermining the credibility of these institutions erodes public trust and opens the door to politically motivated manipulation of economic data and policy. Trump’s desire for lower interest rates, mirroring the policies of the Biden administration, demonstrates a dangerous willingness to prioritize short-term political gains over long-term economic stability.
Looking Ahead: Safeguarding the Fed’s Independence
The future of the Federal Reserve hinges on its ability to maintain its independence. The Powell precedent – the willingness of presidents to publicly pressure and even investigate the Fed chair – sets a dangerous standard. Without a truly independent Fed, monetary policy risks becoming a tool for political expediency, leading to boom-and-bust cycles and ultimately harming the American economy.
The next few years will be critical. The pressure on the Fed to balance inflation control with economic growth will only intensify, particularly as the 2024 election approaches. Strengthening legal protections for the Fed’s independence and fostering a culture of respect for its non-partisan role are essential steps. The alternative – a politicized Federal Reserve – is a risk we cannot afford to take. What steps can be taken to ensure the Fed remains insulated from political interference? Share your thoughts in the comments below!
