The news:
Federal prosecutors recently opened a criminal investigation into Federal Reserve Chair Jerome Powell, focusing on his renovation of the central bank’s 100-year-old headquarters, which is running well over budget. In a video statement on Sunday, Powell alleged that the investigation was meant to intimidate the central bank into lowering interest rates — a long-running bee in Trump’s bonnet — and threatened its independence.
Why it matters:
This investigation into Powell is just the latest in a long string of attempts to influence the central bank, as Vox's Nicole Narea explains.
Last year, Trump dubbed Powell, whom he appointed in 2017, a “major loser” who was “too late and wrong” on inflation. He’s previously called the Fed itself “crazy,” “loco,” and “a bigger problem than China.” And he has repeatedly sought to dictate Fed policy. “It is a perfect time to lower interest rates,” he said last April.
However, independent central banks have a far better track record than those governed by political interests. Politicians have an incentive to boost short-term prosperity, even at the expense of a country’s long-term economic prospects, because they are beholden to voters in regular elections. Independent central bankers, on the other hand, can afford to take a longer view.
There are many examples of countries that suffered economically after their central banks were co-opted by political interests. Take Venezuela, where the country’s authoritarian leaders, Hugo Chávez and the recently deposed Nicolás Maduro, ended the independence of the country’s central bank and ordered it to print more money to finance government deficits during the 2000s and early 2010s. What followed was a period of hyperinflation, where prices rose by double-digit percentage points per month. As their economic prospects dried up, nearly 8 million Venezuelans fled the country in search of opportunities elsewhere.
Turkey also plunged into an economic crisis in 2022 after President Recep Tayyip Erdoğan exercised greater control over the central bank and pressured it to keep interest rates low. As a result, inflation reached a 20-year high, hitting 61 percent in April 2022. The Turkish Lira collapsed in value, and the country was forced to implement capital controls — restrictions on the movement of money in and out of the country — to prevent it from falling further.
What it means for you
The US isn’t Venezuela or Turkey, and Trump’s feud with Powell could wind up a few ways. The investigation could come to naught, as Trump’s vendettas have in the past, or it could produce charges that the president could use as a pretext for firing Powell. (The Supreme Court will decide next week if he can, in fact, do that.)
But regardless of the outcome of this investigation, Powell’s term ends in a few months, and Trump will get to appoint a new Fed chair. And if Trump does succeed in intimidating or persuading the Fed to slash interest rates then, economists and investors expect a few things to happen.
First, the dollar would likely get weaker against other currencies, making it more expensive to travel abroad or buy imported goods. Low interest rates also make it cheaper to borrow money, which typically prompts both businesses and individuals to spend more.
If they spend too much, however, demand outstrips supply, which can make a range of things more expensive. The cost of many goods would likely go up. Wages would increase, as well. And while the federal funds rate set by the Fed would be low, mortgage rates could actually edge higher.
In the long term, research has also shown that less independent central banks experience greater rates of annual inflation. As one Goldman Sachs executive put it in an address last year: “A mark of a successful country in the modern era has been an independent central bank.”
