The Thought of a Federal Takeover Instigated by Trump, or Any Other President, Evokes Fears
In a chilling revelation, Fortune publication penned an article that's a cause for concern for anyone keeping tabs on financial markets and monetary policy. The piece suggests that President Donald Trump might have a viable path to end the Federal Reserve's autonomy, potentially leading to a complete takeover.
The disturbing aspect isn't just that Trump could politicize the Fed, but rather that any president might be able to do so, as many have attempted and failed before him.
Historical Fed Takeover Attempts
Trump has a path to end the Federal Reserve’s independence for a full Fed takeover.
The establishment of the Federal Reserve in 1913, through the Federal Reserve Act, was a response to a series of financial panics. Previous attempts at employing a central bank had ended in disaster. The Treasury managed the money supply, but inherent issues reduced liquidity, especially during crisis times.
Herbert Hoover pressed the Fed to raise interest rates because he thought Wall Street speculation was uncontrolled and that the economy would overheat.
The Federal Reserve was originally designed as an entity independent of politics and whichever party held power. However, presidents quickly began attempting to persuade or force the Fed into specific actions. For instance, in the late 1920s, President Herbert Hoover urged the Fed to increase interest rates to stem uncontrolled Wall Street speculation, fearing an economic overheat.
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The Fed, however, lowered interest rates instead, which fueled borrowing and high-risk investment. This eventually contributed to the 1929 stock market crash and the subsequent economic catastrophe.
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Presidents have regularly sought to influence interest rates to boost their reelection chances. Presidents like Harry Truman and John F. Kennedy had open discussions with the Fed chair, voicing their desires directly.
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Lyndon B. Johnson, embroiled in the Vietnam War after Kennedy's death, pushed particularly hard for interest rate reductions with Chair William McChesney Martin, Jr. Richard Nixon also pressured the Fed chair at the time, Arthur Burns, for monetary policies that would boost short-term job figures, even if it meant long-term economic consequences.
Trump had been critical of the organization. In early February when the Fed held rates steady, he said, “Holding the rates at this point was the right thing to do.” And then, after the decision, he
Presidents have had varying levels of success in their efforts. However, the common denominator is the propensity to prioritize reelection prospects over long-term economic consequences.
lashed out at the organization more generally.
Fed Takeover Ambitions: Trump's Turn
called into question the central bank’s independence,” as
In his first term, Trump urged the Fed to lower interest rates and frequently criticized the monetary policy strategy. During his second term, though, Trump had been openly critical of the organization. When the Fed kept interest rates steady in early February, he said, "Holding the rates at this point was the right thing to do." However, after the decision, he lashed out at the organization more fiercely.
David Zaring, a professor of legal studies and business ethics at the University of Pennsylvania’s Wharton School, told
The Question of Fed Independence
As many presidents have sought to control the Fed or at least interest rates, the desire is understandable but undesirable. If monetary policy were under the executive branch's control, the temptation to meddle would be tremendous. The almost inevitable result would be a recession stemming from political ambition.
The article in Fortune appears to cast doubt on the Federal Reserve's independence. David Zaring, a professor of legal studies and business ethics at the University of Pennsylvania's Wharton School, states that while the Fed guards its independence "very carefully," it lacks a strong legal basis. Moreover, the Supreme Court has hinted at supporting an administration's efforts to incorporate the central bank into a federal takeover.
In conclusion, while direct takeovers of the Federal Reserve are rare, historical instances highlight the propensity of presidents to influence or pressure the Fed. The Fed's independence is vital for its ability to make decisions based on economic data rather than political considerations. The current turn of events, however, raises some concerns about the future of Fed autonomy.
- President Donald Trump's path, as suggested in the Fortune article, could potentially lead to a complete takeover of the Federal Reserve, ending its long-standing autonomy as a central bank.
- In his presentation on the history of Fed takeover attempts, the speaker highlighted how President Herbert Hoover urged the Federal Reserve to raise interest rates in the late 1920s, despite opposition, due to his concerns about uncontrolled Wall Street speculation.
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