The criminal indictment threat against Fed Chair Jerome Powell is not merely a dispute over central bank independence. It's a tactic to make an example of a high-profile official, signaling to all government employees the consequences of defying the administration and forcing out perceived opponents.
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Increasing political influence, including presidential pressure and politically-aligned board appointments, is compromising the Federal Reserve's independence. This suggests future monetary policy may be more dovish than economic data warrants, as the Fed is pushed to prioritize short-term growth ahead of elections.
When government officials like Fed Chair Powell face legal action from the administration, they cannot use agency funds for their defense. This high personal financial burden creates a powerful chilling effect, scaring qualified individuals away from government roles and encouraging resignations.
The threat to the Federal Reserve's independence is not limited to a single appointment. It involves a broader potential strategy of simultaneously nominating a chair, replacing other board members like Lisa Cook, and filling vacancies as they arise. This creates the possibility for a majority of the Fed board to become politically aligned with the administration.
The pressure on Fed Chair Powell aims not only to replace him as chair before his term ends but also to force him to vacate his governor seat, which runs until 2028. This would give the President an extra board appointment, accelerating control over the Fed's seven-member board.
Ongoing political pressure, including attempts to remove a governor and uncertainty over the next Fed Chair, is perceived as a threat to the Federal Reserve's independence. This political risk is a key factor leading to the view that inflation break-evens are too low and their risks are skewed to the upside.
Alan Blinder argues that financial markets are severely underpricing the risk of political interference at the Federal Reserve. He cites the President's attempt to remove a governor and political appointments as clear threats that defy historical norms, calling it "one of the biggest underreactions" he's ever seen.
The debate over Fed independence is misplaced; it has already been compromised. Evidence includes preemptive reappointments of regional bank presidents and outspokenness from governors concerned about being bullied, indicating the Fed no longer operates in its prior insulated environment.
The indictment of former FBI Director James Comey highlights a strategy where the legal process itself is the punishment. The goal is not to win in court but to intimidate opponents by forcing them into expensive, time-consuming legal battles, creating a chilling effect on dissent regardless of the case's merits.
Trump's efforts are not just breaking norms but constitute an attempt at a full-blown "political revolution." The goal is to gain direct political control over institutions like the FBI and DOJ, weaponize them against political opponents, and eliminate the checks and balances that constrain presidential power.
Despite the perception of independence, the Federal Reserve historically yields to political pressure from the White House. Every US president, regardless of party, has ultimately obtained the monetary policy they desired, a pattern that has held true since the Fed's creation.
