Politicizing the Federal Reserve

It's not hard to find mistakes in the Federal Reserve's recent history, but this latest attempt to erode the institution's independence is dangerous. The president wants lower interest rates, but any benefits coming from that would probably be outweighed by supercharged inflation and the economic hangover that comes with it.

Last week, President Trump announced that he would try to fire Fed governor Lisa Cook, whose term otherwise expires in 2038. He cited an unproven allegation of mortgage fraud that one of his appointees dug up and broadcast on social media, but Cook denies wrongdoing, and her attorney says she will "take whatever actions are needed" to stay on the job.

A hearing is scheduled for this morning in regards to her request to block Trump from firing her.

That fight could reach the Supreme Court. The conservative majority has been friendly to the idea that the president can fire executive branch employees at will. Yet the Fed, the justices wrote in May, is "a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States."

The president, like so many of his predecessors, wants lower interest rates, but Fed Chair Jerome H. Powell has pushed back against premature cuts. Advisers talked Trump out of firing Powell, whose term as chair ends next year. Trying to oust Cook is less dramatic but still hugely significant: Her replacement would be the key vote that flips the seven-member board of governors in a more inflationary direction. The new board of governors would also determine who runs the 12 regional Fed banks, whose leaders sit on the committee that sets rates.

The natural consequence of undermining the central bank's credibility is that borrowing costs would soar — weakening the dollar and making interest payments on the national debt an even bigger part of the federal budget. Higher inflation could become a vicious cycle, with workers demanding higher wages merely to offset expected price increases.

The Fed has made some bad political decisions in recent decades, particularly during the 2008 financial crisis and the coronavirus pandemic. Powell's lobbying for more fiscal stimulus in 2020 crossed a line, and the Fed's regulatory agenda appears more political the further it strays from its core competencies. Interventions in short-term corporate debt blurred the line between monetary policy and credit allocation, which is inherently political when a government entity does it. Other decisions were regrettable but not political, such as when the Fed misjudged inflation as "transitory" during the Biden administration.

Future Fed chairs would be wise to learn from the miscalculations of this era. Legitimacy is fragile, and Trump won't be the last politician to exploit missteps for political gain. Critically, though, none of this justifies Trump's reckless behavior.

Markets have so far avoided a panic, but that doesn't signal confidence. The dollar weakened as the Cook news broke, and short‑term bond yields dropped as investors priced in potential rate cuts. Gold prices also climbed as markets hedged against looming uncertainty. The relative calm might reflect confidence that courts will rule in favor of Fed independence.

If Trump gets his way, every future president — Democrat and Republican — will face the same temptations to politicize the Fed: push for rate cuts, juice the economy before elections, and let someone else deal with the consequences later. It's a formula for long-term economic instability.

An editorial from The Washington Post.