A short history of political meddling with the Federal Reserve
DONALD TRUMP thinks dimly of America’s central bank. When he was president, he berated the Federal Reserve for keeping interest rates higher than he wanted, fuming that Jerome Powell, its chair, could be a “bigger enemy” than Xi Jinping, China’s leader. Now the Republican presidential nominee is preparing for another fight if he wins November’s election. On August 8th Mr Trump insisted he should “have a say” over monetary policy during a second term.
Central-bank independence has become the norm in rich countries since the 1990s. It enables monetary policymakers to raise interest rates to control inflation, regardless of political consequences (such as resentment at the slower growth that can result). But political meddling with the Fed had a long history before the modern era. Though the act of Congress that created the Fed in 1913 gave it some protections from politicians, in practice the Treasury controlled the central bank in its early years. In order to finance the second world war, the Fed agreed to hold down borrowing costs by buying Treasury bonds and keeping their yields low.
During the Korean war (1950-53), however, the Fed’s chairman, Thomas McCabe, worried that its bond purchases were fuelling inflation. President Harry Truman ordered McCabe to carry on, saying that a drop in the price of Treasuries “is exactly what Mr Stalin wants”. But McCabe held firm, and by 1951 the Treasury had secured substantial independence. In response Truman tried to take control of the Fed from the inside, replacing McCabe with a young Treasury official, William Martin.
Martin turned out to be anything but a stooge. Serving for almost two decades, he protected the Fed’s independence while taking a hawkish stand on inflation, once comparing the Fed to “the chaperone who has ordered the punch bowl removed just when the party was really warming up”. That set up a confrontation with Lyndon Johnson, who introduced a raft of social spending while also paying for the Vietnam war. In 1965 Martin detected inflation gathering pace and the Fed raised its main rate to 4.5%—its highest level for years. Johnson summoned Martin to his ranch and upbraided him, but his campaign to get the Fed to lower rates was ultimately unsuccessful.
Inflation continued to rise throughout the late 1960s, tarnishing Martin’s record. But his commitment to Fed independence has generally won historians’ approval—especially compared with his successor, Arthur Burns. Burns was appointed by Richard Nixon in 1970 with the expectation that he would do the president’s bidding. When he resisted—first by lowering rates too slowly for Nixon’s liking, then by raising them when inflation picked up again in 1971—the White House planted false stories in the press smearing Burns. Eventually, the Fed was bullied into cutting rates ahead of the 1972 election, helping to deliver Nixon’s second term but setting the stage for huge price rises.
The oil-price shocks of the 1970s would have made fighting inflation hard for any central banker. Nevertheless, Burns’s failure taught Nixon’s successors a bitter lesson about the damage a meddling White House could do. When Jimmy Carter appointed the cigar-puffing Paul Volcker in 1979, inflation was running at 11%, and Mr Carter gave him a free hand. He used it to tighten money supply, sending interest rates up to 21.5% in 1980. The pain contributed to Mr Carter’s landslide defeat to Ronald Reagan that year, but the policy worked. By the mid-1980s, the “Great Inflation” was over and America’s economy was set for a sustained period of strong growth ahead of the presidential election in 2000.
Volcker’s success set the stage for Alan Greenspan’s tenure (1987-2006), which spanned four presidencies and cemented the Fed’s modern-day independence. Ahead of the presidential election in 2000, reverent Democratic and Republican candidates raced to issue promises that they would re-appoint him. Ben Bernanke, too, was appointed by a Republican (George W. Bush) and reappointed by a Democrat (Barack Obama), confirming a norm that even Fed chairs more sympathetic to the party that appointed them would be reappointed by a president of the other party.
By the mid-2010s, however, Mr Trump’s economic populism—combined with his antipathy towards federal bureaucracies—would challenge that consensus. During his 2016 campaign, Mr Trump accused Janet Yellen—whom Mr Obama had appointed—of trying to help Democrats by keeping interest rates low. He later refused to re-appoint her, picking instead the same Mr Powell he now criticises.
While Mr Powell would probably resist a new round of Mr Trump’s demands, his term as chair ends in 2026. It is unclear whether a new Trump-appointed chair would be as independent as he has been, though the need for Senate confirmation would make it hard for Mr Trump to install a total lackey. Kamala Harris, the Democratic nominee, recently defended the consensus that presidents should stay out of the Fed’s business. Mr Trump’s return to the White House could threaten it again.■