A political leader demanding questionable policy from the central bank and testing the legal limits to get it - to Martin Redrado, sitting in Argentina, Donald Trump's stand-off with the Federal Reserve feels surprisingly familiar.
Redrado was fired as head of Argentina's central bank in 2010, after he resisted orders by then-President Cristina Kirchner to hand over reserves to help pay off national debts. He fought the decision successfully in court, but eventually resigned in the face of what he described as intolerable pressure. Today, the clash is remembered as one of the early warnings of economic turmoil that later engulfed Argentina, leading to high inflation and a currency plunge from which the country is still recovering.
Trump's fight with the Fed has sparked debate about whether the U.S. might be heading in a similar direction. Since his return to office last year, Trump has accused Fed Chair Jerome Powell of mishandling the economy and driving up government debt costs by keeping interest rates too high. However, his interventions at the bank have not been limited to social media complaints.
In August, Trump moved to sack top policymaker Lisa Cook, a decision now being challenged at the Supreme Court. Further complicating matters, Powell confirmed the Fed is facing a criminal probe from the Department of Justice over cost overruns linked to property renovations, concerns Powell labeled as a mere pretext.
While market reactions to this drama have remained muted, it signals investors expect the Fed to continue operating independently. This expectation will be tested soon, as the Supreme Court is set to review Cook’s firing and Trump is anticipated to announce a replacement for Powell, whose term ends in May.
Redrado expressed surprise at the American situation, likening it to an emerging market dynamic. Jason Furman, former head of Obama's Council of Economic Advisers, also voiced concerns about the implications of Trump’s demands on the Fed, stating, This is what you do in banana republics, not what should happen in the United States of America. Janet Yellen, former Fed chair, warning against Trump’s influence, echoed the same sentiment, admitting it could lead to a path towards a “banana republic.”
Despite criticisms and pressure, Trump asserts his right to express concerns regarding Fed policies, maintaining that he is justified in his actions. Meanwhile, economists warn that his ongoing interference poses risks for the economy, countering established findings that independent central banks yield more favorable economic outcomes.
The tensions with the Fed are unprecedented in U.S. history. However, political interference in central banking is far from isolated globally. Redrado remains hopeful that the resilience of U.S. institutions prevails, contrasting it with Argentina's past struggles. President Trump is really defeating himself by having this kind of fight, Redrado remarked, urging a more prudent approach.
