Executive Pressure Threatens Federal Reserve Independence and Economic Stability

Key Quotes

"The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president."

Jerome Powell argues that the criminal investigation against him is a direct result of the Federal Reserve's commitment to setting interest rates based on public service, rather than presidential directives. This statement highlights the perceived conflict between the Fed's independent mandate and political pressure.

"Tin pot dictators do this all the time. This is, and and I one of the things I admire Liz for is Liz called it what it is, which is it's the president threatening to jail the Fed chair. Put all the pretext aside, that's what it is."

Justin Wolfers asserts that the actions taken against Fed Chair Jerome Powell are characteristic of authoritarian regimes, not democratic nations. Wolfers emphasizes that, stripping away any pretense, the situation amounts to the president threatening the head of the central bank with imprisonment.

"So what you get often with cases of fiscal dominance is the head of state says, well, I don't like paying interest, and I control the interest rate, or if I take over the central bank, I can control the interest rates. So they could reduce the interest rate with an eye of reducing the government's interest payments, and so far, so good, that works. But what that means now is that you're setting interest rates not to control inflation and not to control unemployment."

Justin Wolfers explains the concept of fiscal dominance, where a head of state prioritizes reducing government interest payments by controlling interest rates, rather than managing inflation or unemployment. Wolfers warns that this approach, if pursued, leads to setting interest rates below what is economically warranted, ultimately causing escalating inflation.

"I was disappointed but not surprised in what the administration did. I was disappointed and surprised in the collective response of the markets today. As you said, stocks ended up higher. I mean, really what you want to be looking at here if you're hoping that there's some check on behavior like this is the bond market."

Liz Hoffman expresses her disappointment with the market's muted reaction to the investigation of Jerome Powell. Hoffman suggests that the bond market, rather than the stock market, is a more reliable indicator of concern regarding such actions, as it has historically served as a check on aggressive policy.

"What we saw this time was an economist, well, Trump's he's actually Powell's actually a lawyer, but playing an economist, not roll over. And let me give you one other example. Mark Carney hasn't rolled over. And so we've spent days as economists being reviled as being the worst possible people in the world. But when it comes time for hard choices and a spine, I'm proud to call myself an economist and to be in the same profession as those blokes."

Justin Wolfers praises Jerome Powell for demonstrating significant backbone in the face of pressure, contrasting him with other leaders who have capitulated. Wolfers expresses pride in the economics profession for individuals like Powell and Mark Carney who have stood firm during difficult times.

"This isn't about the renovation, this is about interest rates. This is the president using the DOJ to intimidate and influence Jerome Powell, which is why futures fell, and it's why gold and silver both hit a record high. Put another way, something about that video got through to people."

Ed Elson concludes that the investigation into Jerome Powell is a politically motivated attempt to influence monetary policy, not a genuine concern about building renovations. Elson points to the market's reaction and the widespread agreement that the action is wrong as evidence that Powell's video statement effectively communicated the truth of the situation.