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What historical challenges does the Federal Reserve's independence face?
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The U.S. Supreme Court is about to consider whether to overturn the 1935 Humphrey case and give U.S. President Trump the power to fire the Federal Reserve chairman.
Presidents of the United States usually keep a certain distance from the Federal Reserve, avoid excessive interference, and maintain the independence of its decision-making. But Trump is an exception. During his campaign, he hinted that he was willing to break the rules and have a greater say on interest rates. In this video, Nick Timiraos, chief economics correspondent of the Wall Street Journal, and Richard Clarida, former vice chairman of the Federal Reserve, analyze what Trump's return to the White House means for the Federal Reserve and its current chairman Powell.
Since Trump began his second term, the conflict between him and Powell has intensified. This conflict not only highlights the deep differences between the US government and the central bank on monetary policy, but also triggers widespread concerns that the independence of the Federal Reserve may be eroded. Trump has always adhered to the concept of "economy first", believing that tax cuts and deregulation can inject strong impetus into economic growth; while Powell pays more attention to the long-term stability of the economy and the prevention of potential risks. The difference in policy concepts has caused the two to confront each other on many occasions.
Powell was nominated by Trump in 2017 to succeed Janet Yellen as Fed chair, breaking the tradition of Democrats running the Fed for 30 consecutive years. However, Trump's original expectation that Powell would continue the loose monetary policy soon fell through. After taking office, Powell quickly returned to the Fed's traditional policy stance. In 2018, the Fed implemented four interest rate hikes, which was in sharp contrast to the gradual fading of the benefits of Trump's tax reform and the impact of the trade war on the economy. Rising corporate borrowing costs led to sharp stock market fluctuations, which directly hit Trump's proud stock market performance. Although the Fed cut interest rates three times in 2019 by a total of 75 basis points, Trump still demanded at least another 100 basis point cut and publicly accused Powell of "having no guts". At that time, the US unemployment rate had fallen to a historic low of 3.7%, and inflation was close to the target level of 2%, leaving very limited room for traditional monetary policy operations. Powell insisted on viewing these interest rate cuts as "mid-term adjustments" rather than entering a full easing cycle, which fully demonstrated his high vigilance against the risk of overheating of the economy.
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