National Review Online
Tuesday, April 22, 2025
If Donald Trump is upset about higher interest rates, he
should stop doing just about everything he can to undermine the U.S. economy in
the eyes of the world. As the U.S. becomes a riskier place to do business
because of tariffs and fiscal uncertainty, and the independence of the central
bank comes under threat from the president, people will demand higher yields to
make buying U.S. sovereign debt worth their while.
Maybe you think Trump’s trade policy has merit or the
Federal Reserve needs to be brought more firmly under the president’s control.
That’s a separate question from how real investors with real money in the real
world are really reacting to Trump’s decisions. Their verdict is clear: They
don’t like it, they’re going to keep saying so with their money as long as the
president doesn’t change course, and that has real negative consequences for
Americans.
The stock market is down, and that’s bad. Worse is the
simultaneous decline in the value of the dollar and the price of U.S.
government bonds. That’s more akin to what happens in poor countries facing
economic crises, not in the richest country in the history of the world.
Even during the Great Recession, which began with a
financial crisis originating in the U.S., investors worldwide fled to the
safety of U.S. government bonds. They fled to the safety of the U.S. dollar in
currency markets. The U.S. position was so rock-solid that even the worst
downturn since the Great Depression couldn’t shake it.
Now, the story is different. And part of the reason why
is a president who feels unconstrained by constitutional, statutory, or
economic arguments against exerting unilateral power whenever he feels moved to
do so.
It would be one thing if Trump had a fleshed-out economic
plan and was sticking to it. Aside from any questions of the merits of his
decisions, though, investors first and foremost have seen uncertainty and lack
of credibility. Tariffs are on one day, off the next. One of the reasons the
Founders made tariffs, and taxation more generally, a legislative matter is
that they knew how important it was to have certainty in tax policy. Even more
than trade, certainty and credibility are vital to monetary policy. Trump’s
recent pressure on Federal Reserve Chairman Jerome Powell to cut interest
rates, combined with reporting suggesting that he desires to fire Powell, is
spooking investors as few other things can.
The reason is that politician-driven monetary policy has
a decades-long record of failure in countries across the globe. Countries with
independent central banks have greater credibility to stick to inflation
targets and weather instability. Basically every rich country has one. The
Federal Reserve has become more independent over time, and inflation has
generally run much lower since then.
The Fed still makes plenty of mistakes. It stayed in
emergency mode for too long during Covid, overshooting the increase in the
money supply and contributing to the inflation that occurred. It did so,
however, by keeping interest rates too low, the exact thing that Trump is now
encouraging.
Trump always wants low interest rates. He bugged Powell
about it during his first term, too. (That’s the same term in which Trump
appointed Powell chairman, by the way.) From a politician’s point of view, low
interest rates mean lower car payments and mortgage payments, which make voters
happy in the short term. But it can also contribute to inflation, which, as
Democrats can tell you by pointing to their scars, voters really hate.
Independent central banks help to mitigate that problem
by removing the money supply from the direct control of politicians. The Fed
has also branched out into other areas beyond the money supply, pontificating
on inequality, climate, race, and other issues. Trump could rebuke these errors
by calling for legislation from Congress to better constrain the Fed to its
proper place.
Powell’s term as chairman is up next year regardless. By
insisting that the next chairman single-mindedly focus on macroeconomic
stability and keep a healthy distance from politics, Trump could help put the
Fed on a better path.
But he isn’t interested in that. He wants lower interest
rates, and Powell isn’t going to give him them at the moment. He also wants the
power trip of firing the chairman of the Federal Reserve, who can only be fired
by the president “for cause,” according to the Federal Reserve Act. Disagreeing
about interest rates is not such a cause.
There’s a constitutional argument to be made that such a
restriction on the president’s power is impermissible. But it shouldn’t even
get to that point, because firing Powell is not helpful to Trump’s own
interests.
Voters want economic stability, and firing Powell would
only create more instability. The market consequences are dire, and not just
for “Wall Street.” State-level Republicans are looking at depressed revenue
forecasts and hearing warnings from their pension funds about shortfalls
because of investment losses. Manufacturing firms in the middle of the country
are warning about higher prices, and some are announcing layoffs. Millions of
Americans at or near retirement age are seeing their savings disappear.
The ballooning federal debt also becomes harder to
finance if demand for government bonds declines. That’s the same federal debt
that Republicans made it their policy to ignore in the platform adopted at the
2024 national convention that nominated Trump, a promise they are keeping in
their budget resolution. That means future tax increases,
inflation, or both are on the way.
One way to avoid chaotic and ill-considered trade and
monetary policies is to keep any one person from being able to change them at
will. That has been the traditional American practice, and it would be best to
follow it.
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