President Donald Trump's escalating attacks on Federal Reserve Chairman Jerome Powell pose a threat to the entire economy, Chris Hughes of the Economy Security Project warned in an analysis for The New York Times published on Friday.
Powell has publicly warned that the effect of Trump's tariffs will be rising prices and additional pressure against rate cuts at the Federal Reserve. Trump has responded by publicly slamming the Fed chair, whom he first appointed, and even threatening to fire him — something that has never been done.
"This latest escalation brings us even closer to a full-blown crisis over Fed independence," wrote Hughes. "Mr. Trump’s dislike for Mr. Powell is more than a personal spat. It’s a direct challenge to the economic foundation that has helped make America prosperous for generations. The Federal Reserve, established in 1913 and reconstituted in 1935, manages interest rates to ensure credit doesn’t become too expensive, stifling investment and employment, or too cheap, spurring inflation. The Fed also regulates and supervises financial institutions to ensure they are financially sound."
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"Like many institutions, the Fed has an imperfect track record in meeting its goals, but a fundamental ingredient to its success has been insulation from political pressure — precisely what the president is targeting," wrote Hughes. Trump is far from the first president to try to erode that independence, but previous attempts have tended to lead to disaster.
For instance, he noted, in the 1970s, "when the Fed chair, Arthur Burns, laid the blame for rising prices at the feet of Congress and the White House, President Richard Nixon responded with a public smear campaign against Mr. Burns, his former friend. Under pressure, Mr. Burns intensified his search for inflation-fighting methods that wouldn’t require steep rate hikes, but the failure of those efforts led to stagflation."
Should Trump's far-greater pressure campaign succeed and subordinate the Fed to the White House entirely, Hughes wrote, the damage could far outlast Trump.
"Interest rates would fluctuate with election cycles rather than economic conditions. Inflation expectations would become unanchored, creating the potential for prices to spiral out of control. The dollar’s status as the world’s reserve currency — which gives America enormous economic advantages — would be jeopardized."
As Trump goes to war with Powell, he concluded, he "isn’t making America great. He’s dismantling the institutional architecture that made American prosperity possible in the first place."
