Trump presses on the Fed. Former heads of the Central Bank call for independence

Former heads of Fed, Janet Yellen and Ben Bernanke, appealed in the New York Times daily to preserve the independence of the US central bank. They asked Donald Trump to choose someone who would not succumb to political pressure as the next president of the federal reserve.

Bernanke, who headed the FED in 2006-2014, and Yellen, head of the bank in 2014-2018, emphasize in a common article that the independence of the central bank is of fundamental importance for his ability to effectively control the country's economic economy.

“Recent attempts to undermine this independence, including the President's request, that (FED) radically reduced interest rates, and threatening its chairman Jerome Powell, if he does not bend, they bring the risk of permanent and serious damage caused by the economy,” Bernanke and Yellen warn.

The president's behavior is undermined not only by Powell's position, but also by all future heads of the bank, as well as the institution itself – the authors explain.

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The independence of the federal reserve does not mean that it is not subject to democratic control; The bank's mission is to ensure the maximum employment rate and price stability and its management regularly submits reports and explanations regarding the implementation of these tasks before the Congress committees.

If the central bank is forced to finance the government deficit, e.g. by maintaining excessively low interest rates, as was the case in the years of World War II, it leads to high inflation. In the US, two -digit inflation remained until late 1940s and only in 1951 a reform was carried out, which separated the management of the budget deficit from monetary policy – they remind Bernanke and Yellen.

This episode sheds light on a fundamental principle: if investors see that monetary policy is used to facilitate the government of borrowing money, they lose their faith that inflation will remain low. As a result, those who invest in American government bonds demand their higher interest to compensate for “the likely erosion of their capital.” The irony is that it raises the cost of credit for everyone, both for ordinary citizens and for the US government – former heads of FEDs write.

The independence of the federal reserve also allows it not to succumb to pressure related to the election cycle, when presidential candidates are focused on a very close horizon and can demand quick, adverse solutions calculated for a short stimulus for the economy.

Pressure, stagflation and recession …

President Richard Nixon before the election in 1972 forced Arthur Burns, the head of the Fed, to keep low interest rates, which led to stagflation – High inflation in combination with economic stagnation – remind the authors.

Stagflation has remained for many years and only another head of the central bank, Paul Volcker, managed to control it in the 1980s – at the price of a painful recession. “When the Fed loses credibility, its recovery is expensive, as the recession scale from Volcker proved“In addition, undermining the independence of the FED receives its main advantage – the ability to attract foreign capital – emphasizes the authors.

They also turn to Trump, who will indicate Powell's successor, when in the spring of 2026 his term ends, that “in the interest of the US economy he would choose a person who will keep the proper distance between the Fed and the short -term policy.”

On Friday, the finance ministers of the G20 countries, who met in Durban in South Africa, announced in a joint announcement that the independence of central banks is fundamental. AFP pointed out that the statement was issued in the context of strong pressure exerted on the head of the Fed. (PAP)

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