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Trump’s attacks on the Federal Reserve has a worrying precedent



Trump Nixon
Presidents Donald Trump, left, and Richard


  • President Donald Trump has publicly criticized the
    Federal Reserve’s current path of interest-rate hikes for the
    third time in a month.
  • The criticism revived concerns about the US Federal
    Reserve’s political independence.
  • Presidents have pressured the Fed before, most notably
    Richard Nixon.
  • Nixon convinced then-Fed Chairman Arthur Burns to keep
    interest rates low, leading to nearly a decade of economic

US President Donald Trump once again broke with White House
convention on Tuesday, criticising the policies of the Federal
Reserve and its chair, Jerome Powell.

In an interview with Reuters, Trump said he was
“not thrilled” by Fed chairman Jerome Powell’s decision to raise
interest rates
and would continue to criticize the Fed if
interest rate hikes continued. It followed reports earlier in the
day that Trump had criticised Powell at a private GOP fundraiser.

Trump’s criticisms of the Fed are nothing new. The president made
similar comments in an interview with CNBC as recently as late
July. But the latest comments remain significant given the
long-standing tradition that presidents do not comment on matters
of monetary policy.

While the White House attempted to assuage concerns by
reiterating the president’s support for the Fed’s independence,
the comments raise the spectre of a huge policy mistake made in
the 1970s.

Richard Nixon, the Fed, and stagflation

The Federal Reserve’s structure is unique within the US
bureaucratic system. It operates within government but
simultaneously remains relatively independent, with only some
oversight from Congress.

The Fed’s independence is couched in the belief that for a
central bank to achieve its aims — ensuring financial stability
and long-term growth — it should be free from the pressure that
might be exerted by politicians seeking to alter policy for their
own ends, rather than putting the country’s prosperity first.

The most notable example of a president violating this edict of
independence occurred under Richard Nixon in the 1970s.

In the run-up to the 1972 election, Nixon wanted to present the
country with a strong economy and low unemployment. To do so,
Nixon swapped out Fed Chairman William McChesney Martin with his
pick, Arthur Burns.

pressured the new Fed chairman
to keep interest rates low to
help maintain lower unemployment. The released Nixon
tapes revealed numerous conversations
between the president
and Burns in which Nixon pressures the Fed chair to keep rates
low. Nixon even told advisers “we’ll take inflation if necessary,
but we can’t take unemployment.”

Burns did, in fact, keep rates relatively low but it proved to be
disastrous as it helped to usher in a period of stagflation
— high inflation, high unemployment, and low economic growth.

Not until Paul Volcker took over the Fed nearly a decade later
and ratcheted up interest rates in
what is known as the “Volcker Shock”
would the issue be truly

Other incidents, including President George H.W. Bush complaining
about the policies of his Fed chair, Alan Greenspan, have also
occurred, but Bush’s comments were far more muted than Nixon’s
extended pressure.

Defenders of Fed independence point to the Nixon example to
support their argument that politicians should not attempt to
tamper with monetary policy. There is also empirical evidence to
support this claim.

Gregory Daco, chief US economist at Oxford Economics, pointed to
research by Alberto Alesina and Lawrence Summers that showed in
countries with a politically influenced central bank had higher

“While reviewing 16 OECD economies, they showed that countries
with independent central banks generally had lower inflation
without ‘suffering any output or employment penalty’,” Daco said.
“As such, central banks acting outside of the political sphere of
influence would be most desirable in any country.”

While Trump is far away from Nixon’s level of interference, Daco
said it is an important theme to keep an eye on.

“While current conditions are very different from those of the
1970s, we must not forget that the premise of central bank
independence rests on the advantage of insulating monetary policy
from short-sighted political objectives,” he said. “While
inflation expectations are currently well anchored, history shows
us that a pervasive lack of central bank independence can
rapidly, and without warning, lead to rising inflation and
economic instability.”

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