Trump’s crude pressure campaign for lower US interest rates threatens to unleash new waves of inflation worldwide
Central bank officials from different countries have made a joint statement that is not common to support Jerome Powell, the head of the US Federal Reserve (Fed). This comes at a time when Powell is experiencing a criminal investigation and intense pressure from Donald Trump to resign early.
It is very remarkable for central bankers from different countries to speak as one like this. But the matter is serious.
They raised their voice because decisions made by the US Fed influence the entire world. If the US permits political pressure on its central bank, it could set a risky example for other countries.
Over the past few decades, most countries have approved that central banks should be autonomous. This means politicians should not dominate interest rates. Independent central banks pay attention on controlling inflation, not winning elections.
This system guided the world avoid the very high inflation that occurred in the 1970s. Letting politicians dominate interest rates again could bring those problems back especially, if the politician is inconsistent, like Trump.
Trump’s repeated attacks on the Fed
Trump has criticized the Fed many times. He wants to get rid of Powell before his term ends in May. But US law says a president can only remove the Fed chair for serious legal reasons, not just personal grudge.
At this moment, the US Supreme Court is talking about whether the president can exclude another Fed official. At the same time, Powell has notified a legal notice associated with his testimony about expensive renovations of Fed buildings.
Trump says he is not taking part in the investigation. Powell, however, says the building issue is just an excuse. He believes the main objective is to pressure the Fed to follow political arrangements instead of economic fundamentals.
For this reason, central bankers from countries like Australia, Canada, the UK, Europe, South Korea, Brazil, and others released a statement. They said that central bank independence is essential for price stability and a healthy economy, and it must be safeguarded.
Top US economists also helped Powell, including all living former Fed chairs. One of them was Alan Greenspan who was a famous former Fed head. They alerted that interfering with the Fed could seriously harm the economy and could create higher inflation.
Why it matters for global inflation?
Trump wants the Fed to cut interest rates dramatically from about 3.5–3.75% down to 1%. Most economists believe that it would cause inflation to rise instantly.
Inflation in the US is already above the Fed’s 2% target. Normally, interest rates are only cut to 1% during a major economic depression.
History indicates the danger of political control over central banks. In the early 1970s, the US government forced the Fed to cut rates before an election. This later caused very high inflation. A similar situation occurred in Turkey in the 2020s, where political pressure led to growing prices.
Trump should be careful about what he wishes for
If he manages to pick a Fed chair and board members who do what he wants, and they lower short-term interest rates to 1%, prices would start to rise speedier.
This would also push long-term interest rates higher. If this happens, Americans could face more expensive loans and bills before the mid-term elections in November.
After that, the economy might go slow or even go into a recession, because interest rates would have to rise a lot later to control the price increases.
As more than a dozen global central bank leaders have said, what happens in the US affects the whole world.
