Ratcheting Up the Attacks
- The Trump Administration ratcheted up attempts to force the Federal Reserve (Fed) to lower interest rates by opening a DOJ investigation into Federal Reserve Chair Jerome Powell.
- Decades of empirical research across countries show that an independent central bank is a critical part of containing inflation for the long run.
- Attacks on Fed independence make it less likely that the Fed will cut rates, but a successful “political capture” means cuts to short-term interest rates, higher longer-term rates, and potentially significant declines in risk assets.
On January 11, news reports indicated that the U.S. Department of Justice was seeking indictments against Fed Chair Jay Powell related to the renovation of Federal Reserve buildings in Washington. As New York judge Sol Wachtler commented, “A grand jury could indict a ham sandwich.” There is widespread recognition in the financial community that the investigation is aimed at removing Jay Powell so that the Trump Administration may replace him with a more compliant Fed Chair. In response to the news reports, Jay Powell released a brief video statement criticizing the DOJ investigation and casting it as a debate on “whether the Fed will be able to continue to set interest rates based on evidence…or by political pressure or intimidation.”
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