The Fed Hasn’t Always Been Independent. Trump Is Testing Its Boundaries.

Sen. Tim Scott (R-SC), President Donald Trump, and Federal Reserve Chair Jerome Powell touring the Federal Reserve’s $2.5 billion renovation project in July. (Chip Somodevilla/Getty Images)

Federal Reserve Chair Jerome Powell is facing the kind of political fire from the White House that would have seemed unthinkable before the rise of Donald Trump.

Not since Richard Nixon has a president challenged the Fed’s authority in monetary matters, much less called the chairman a “numbskull.” The need for central-bank independence is a belief so strongly held by most economists and mainstream politicians, left and right, as to be dogma.

“The Fed’s credibility—its perceived willingness to make hard decisions based on data and nonpartisan analysis—is an important national asset,” Ben Bernanke and Janet Yellen, two former Fed chiefs, wrote this year. “That credibility requires that monetary policy be seen as independent from short-term political considerations.”

Yet, opponents argue, the concept of central-bank independence is undemocratic, with unelected experts making decisions best left to voters through their elected officials.

To Trump, Powell and the Fed “have FAILED” the American people by keeping interest rates too high, losing their right to independence. “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost,” Trump wrote on Truth Social.

In late July, Trump toured the Fed headquarters under construction in Washington, D.C. He quickly acknowledged that his main goal was to put pressure on Powell to lower interest rates.

Fed critics come from the left as well as the right. Frank Stricker, writing on the Democratic Socialist website, argues that the Fed’s intense focus on fighting inflation often leads to worker-unfriendly outcomes including job losses, wage reductions, and recessions.

“All in all,” Stricker writes, “if you depend on wages for a living, the Fed is not your friend.”

How did the Fed become so unpopular?

The idea of central-bank independence arose out of a worldwide recession that followed World War I and the 1918 influenza pandemic. Europe was in ruins, the world was awash in debt, and countries looked inward—closing borders, erecting trade barriers, raising capital controls. Global productivity plummeted.

Economists and bankers from 39 nations gathered for two weeks in Brussels in 1920, producing a catalog of recommendations that can be summed up as: fiscal discipline, free trade, and sound monetary policy led by independent central banks. These remain the three pillars of responsible financial stewardship, supported by mainstream economic theory and enforced by technocratic institutions such as the International Monetary Fund.

Yet these belt-tightening policies require sacrifices, as the experts in Brussels knew.

“[T]he answer is a very painful one, and yet a very simple one,” said Robert Chalmers, the British Treasury official and baron. “We must all work hard, live hard, and save hard.”

“Call it the austerity effect,” writes economist Clara Mattei in The Capital Order, “the inevitable public suffering that ensues when nations and states cut public benefits in the name of economic solvency and private industry.”

The advantage of being an independent central bank is to be free from public backlash. As British economist Ralph G. Hawtrey advised central bankers in 1925: “Never explain; never regret; never apologize.”

Paul Volcker demanded independence from the White House before taking over as Federal Reserve chairman. He is now revered as the Fed chief who whipped the ‘70s inflation. Photo: Bettmann Archive

But it was never that easy. In the U.S., until the 1935 Banking Act, the Treasury secretary was the de facto Fed chief. Millionaire banker Andrew Mellon’s low-rate regime under three presidents powered the Roaring ’20s right into the Crash of ’29 and the Great Depression.

The Fed’s first show of independence came in 1951, when it confronted President Harry Truman over the same issue being debated today: the national debt.

Then it was World War II obligations, which Truman wanted to pay down with lower rates. The Fed, led by Thomas McCabe, insisted on higher rates to counter soaring inflation.

Truman expected McCabe, his nominee, to cave. But the chairman, wrote H.J. Nelson in Barron’s Trader column, “objects to the Federal Reserve Board becoming a Treasury appendage.”

The Fed fought for its independence.

“If we fail,” Marriner Eccles, the vice chairman and former chairman, told his colleagues, “the public will get the impression that we have capitulated and lack the courage to discharge our responsibilities.”

Truman backed down, and the Treasury-Fed Accord of 1951 formalized the central bank’s independence.

Nixon didn’t get the memo. He badgered his handpicked Fed chief, Arthur Burns, for lower rates in a way that was “startling and even frightening,” Burns wrote.

Nixon’s goal was another term, and he wanted easy money to juice the economy. Burns went along, resulting in reelection—and the double-digit inflation of the late ’70s.

Lower rates, it seems, is all politicians ever want.

“I cannot remember many calls from presidents or Capitol Hill for the Fed to raise interest rates,” former Fed Chairman Alan Greenspan wrote. “In fact, I believe there was none.”

That’s the point. Elected officials are usually looking to get elected, and it is easier to do that in a booming economy than in a recession. Yet sometimes a recession is the prescription.

Consider Paul Volcker. He is revered as the Fed chief who whipped the ’70s inflation. Yet he accepted the job only after demanding absolute independence from President Jimmy Carter, who was so desperate, he relented.

Volcker’s solution—painfully high rates—triggered the nation’s worst economic downturn since the Great Depression. Powell, too, said he was willing to risk a recession to tame rising prices.

Could elected officials be counted on to make the “hard decisions,” as Bernanke and Yellen called them?

“[The Fed’s] actions are seldom popular,” Eccles wrote, nicely foreshadowing the central bank’s latest clash with the White House: cost overruns in the $2.5 billion renovation of the Fed’s headquarters, the Marriner S. Eccles building.

Trump is laying the blame on Powell, saying it was “highly unlikely” that he would fire him—“unless he has to leave for fraud.”

The days of “Never explain; never regret; never apologize” are long gone.

Write to editors@barrons.com