President Donald Trump has sparked concerns about the US economy with his threat to fire Federal Reserve Chair Jerome Powell. The move sent stock prices tumbling, but Trump later disavowed plans to fire Powell, calling them “highly unlikely.” Several big-bank CEOs have emphasized the importance of an independent central bank, warning that a politically compromised Fed could lead to high inflation and economic instability.
According to experts, a central bank beholden to politics often favors lower interest rates to boost short-term economic activity. However, this approach poses risks in the form of years-long inflation fueled by consumer demand. Alan Blinder, a professor of economics at Princeton University, notes that leaving monetary policy in political hands can lead to excessive inflation.
Trump has repeatedly urged the Fed to cut interest rates to bolster the economy. He argued that lower rates would reduce US debt-service payments and save “trillions of dollars in interest cost.” However, economists disagree on whether interest-rate cuts are currently needed, and the prospect of a politically compromised Fed threatens to drive up inflation expectations.
Wendy Edelberg, director of the Hamilton Project, warns that widespread inflation worries could lead to high interest rates, as investors fear a cascade of rate reductions and a resulting spike in prices. She cites the 1970s and 1980s as cautionary tales, where a burst of high inflation led to economic instability.
Despite the risks, public scrutiny and government oversight help ensure the Fed serves the interests of the public. Edelberg emphasizes that while independence is crucial, it’s not absolute. The central bank already faces supervision from elected officials in the form of congressional testimony and Senate approval.
The Fed attributes spending overruns tied to its $2.5 billion building renovation project to unforeseen cost increases, saying that the renovation will ultimately “reduce costs over time by allowing the Board to consolidate most of its operations.” However, analysts remain skeptical about the Fed’s ability to maintain independence in the face of political pressure.
As Powell’s term ends in May, his nomination for a second term is set to be reviewed. The future of the Fed and its independence hangs in the balance, with experts warning that a politically compromised central bank could have far-reaching consequences for the economy.
Source: https://abcnews.go.com/Business/independent-federal-reserve-matter-experts-explain/story?id=123831800