Attack on the Federal Reserve chair is a dangerous move | Jon Talton

The historic crash of the banking system, including Washington Mutual, along with the housing bust in 2008 led to the Great Recession, but it was the Federal Reserve Bank that kept this disaster from causing a second Great Depression.

As the “lender of last resort,” ensuring trust in the entire world financial system, the Fed relieved a beleaguered banking system by unusual measures as the central bank was led by the foremost Depression scholar, Chair Ben Bernanke.

The Fed's policies impact the daily lives, too. When Americans take out car loans or credit cards, the rate of lending is tied to the Federal Funds rate set by the Federal Reserve's Open Market Committee.

Now, this administration, operating again on the very edge of the Constitution and the authority of previous presidents, is launching another bid for greater power.

According to The Associated Press, the president “dramatically escalated his confrontation with the Federal Reserve, his Justice Department investigating and threatening a criminal indictment of the independent central bank and serving it with subpoenas.”

The debate is apparently about Fed Chair Jerome “Jay” Powell’s testimony before Congress in June over a major renovation of the Federal Reserve headquarters in Washington, D.C. But in a statement, Powell, abandoning his previous attempt to ignore the president’s relentless criticism, called the administration’s threat of criminal charges “pretexts’’ in the president’s campaign to seize control of U.S. interest rate policy from the Fed.

The president has repeatedly criticized Powell — whom he placed in charge of the central bank in his first administration, firing the respected chair and economist Janet Yellen — and the Fed for not moving faster to cut rates. Economists warn that a politicized Fed that caves in to the president’s demands will damage its credibility as an inflation fighter and likely lead investors to demand higher rates before investing in U.S. Treasurys.

According to the AP, the criminal investigation — a first for a sitting Fed chair — sparked a robust response from Powell and defense from three former Fed chairs, a group of top economic officials and even Republican senators who likely will be voting on the president’s eventual pick to replace Powell as Fed chair when his term expires in May.

White House press secretary Karoline Leavitt told reporters that Trump did not direct his Justice Department to investigate Powell, who has irritated the president by insisting on setting the Fed’s benchmark interest rates based on data instead of the president’s wishes.

“One thing for sure, the president’s made it quite clear, is Jerome Powell is bad at his job,” Leavitt said. “As for whether or not Jerome Powell is a criminal, that’s an answer the Department of Justice is going to have to find out.”

To critics, this is an attempt by the occupant of the Oval Office to gain control over an independent agency of the federal government.

The president argues that an economic boom is occurring, and rates should be cut to pump more money into the economy, while Powell has taken a more cautious approach in the wake of the president’s tariffs.

According to The Wall Street Journal, the Fed's independence is a highly sensitive issue for financial markets, where investors rely on the central bank to make policy based on economic reality, not the president’s political preferences. Investors worry that presidents will often favor cutting rates too aggressively, prioritizing a booming economy over keeping inflation low.

The Financial Times reported that Sen. Thom Tillis, a Republican from North Carolina who sits on the powerful Senate Banking Committee, has accused administration officials of “actively pushing to end the independence of the Federal Reserve.”

He vowed to oppose the confirmation of any nominee for the Fed until the “legal matter is fully resolved.” Alaska Republican Sen. Lisa Murkowski on Monday applauded Tillis’ stance, saying he was “right” to block any Fed nominees unless the probe was dropped.

Mohammad El-Erian, a distinguished economist and part-time professor at the University of Pennsylvania’s Wharton School, posted on X, “For those of us who value the operational autonomy of central banks, the risk is that this situation could expose deeper issues — further undermining the credibility of a Fed whose public standing is already fragile.

The Financial Times also reported that “For months, market participants have been obsessing over who will replace Powell when he is due to step aside in May.”

This is virtually unprecedented. And, according to The Financial Times, “big investors are increasingly doubtful that monetary policy from the Fed will be sensible enough, in the long term, to really justify the crucial role that American government bonds and the dollar occupy in global finance.”

The president appears to want to run the central bank himself.

As I write, the stock markets are only slightly down. Financial Times reported that, for example, Jan Hatzius, chief economist at Goldman Sachs, stressed that U.S. monetary policy is set by committee, not by just one person. “I have no doubt that [Powell] in his remaining term as chair will make decisions based on the data,” Hatzius added. “My expectation again is that the committee will continue to make decisions on the back of their mandate and the economic data.”

This hope is foolish, especially if another financial crisis comes.

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