Federal Reserve Chair Jerome Powell, more than any other single figure, stands in the way of Donald Trump’s desire to bring the Fed under his personal control.Nathan Howard/Reuters
Which is the most ludicrous part of the Trump administration’s attempt to portray the chairman of the Federal Reserve, Jerome Powell, as a criminal? Is it the suggestion that the distinguished 35-year public servant somehow took it into his head, at the end of a career unmarked by any previous stain on his integrity, to try to smuggle a $2.5-billion renovation project past the Congress?
Is it the sudden insistence on frankness and transparency from an administration that lies as easily as it breathes? Is it the profession of horror at the thought of people in high office constructing grandiose and unnecessary buildings at public expense? Or is it the pretense that the decision to bring charges was all the work of Jeanine Pirro, the former Fox News host who is notionally U.S. Attorney for the District of Columbia?
It’s all nonsense, obviously. The Trump administration’s penchant for siccing the justice department on its political enemies is well known, and when I say “Trump administration” I mean one man, Donald Trump.
Fed Chair Jerome Powell issued a video statement in which he bluntly characterized the threat of criminal charges against him as simple 'pretexts' to undermine the Fed’s independence when it comes to setting interest rates.
The Associated Press
What is at stake here is not merely the reputation of Mr. Powell, but the independence of the institution he heads. Mr. Powell, more than any other single figure, stands in the way of Mr. Trump’s desire to bring the Fed under his personal control. Because Mr. Trump cannot lawfully fire the Fed chair – they can only be removed for “cause” – he has had to invent a cause.
It is hard not to hear echoes of the Coyne Affair, 65 years ago: the same assault on the independence of the central bank, by the same means – the crude attempt to remove its leader – on the same spurious grounds – a baseless slur on his integrity – in either case driven by the personal pique of the vengeful and insecure man atop the government.
But whereas the Diefenbaker government had no real disagreement with the policies pursued by James Coyne – they wished merely to avoid the blame for them – Mr. Trump clearly wants control of the Fed for one reason only: to force the central bank to cut interest rates to whatever level Mr. Trump deems appropriate (“1 per cent … or better” if you were wondering), the better to spare the U.S. government the costs of its own profligacy (a deficit of 6 per cent of GDP, in the absence of either recession or war).
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This is the very reason central banks were granted their independence in the first place. To give a government burdened with debt access to the printing presses is to place it in an obvious conflict of interest. The temptation to inflate its way out of its debts will be overwhelming.
At least, that’s how it was in the old days. The sophistication of modern capital markets means debt repudiation-by-inflation is not only reckless folly: it’s more or less impossible. Having been burned badly in the 1970s and 1980s, bond buyers remain vigilant against any attempt to devalue their holdings. At the first whiff of inflation, bond prices drop – another way of saying interest rates rise – depriving the government of whatever fiscal relief it had anticipated.
That, more than any institutional arrangement, is what has really guaranteed central banks’ independence. Governments in most democratic countries discovered that debasing the currency didn’t pay: not fiscally, and not, God knows, politically. Only the dictatorships remain foolish or insulated enough to attempt it, with results that are as well known as they are inevitable: hyperinflation.
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Why inevitable? The effort can succeed, even in theory, only by generating faster inflation than bond markets expect. But markets soon catch on, marking up rates accordingly, requiring the central bank to respond with still higher rates of inflation. And so on and so forth, per amentia ad astra.
Mr. Trump aspires to be a dictator, and is quite capable of repeating their mistakes. A Trump-run Federal Reserve might be able to drive down rates in the very short end of the market, but only at the cost of higher long-term rates: the kind that, among other things, mortgages are based on. That’s the sort of thing that gets governments defeated in elections – where elections are still held, that is.
But Mr. Trump might yet be saved from himself. The attempt to traduce Mr. Powell is so vile, and Mr. Powell’s response, an immensely dignified defiance, so devastating – another echo of the Coyne Affair – that even Republicans are shrinking from the task. Mr. Trump seems bent on reducing the United States to rubble in any number of ways. With luck, these will not include the destruction of its financial system.
James Coyne, Bank of Canada Governor from 1955 to 1961, was the father of Globe and Mail columnist Andrew Coyne.