OCTOBER 28, 2024 – It’s no secret among people who know me that I see no redeeming trait in the Republican candidate for president. In fact, I see only a disposition and impulses that have already damaged our country and body politic. In the second go, if he wins or seizes power, he will do more damage, potentially more serious and irreparable that in the first term.
Trump hates the independence of the Federal Reserve because he believes he should have exclusive control over monetary policy. He’s exhibited no knowledge or interest in understanding policy of any sort, let alone in the realm of economics. Though he fooled people into thinking he was a “businessman” (he’s not), running a business is a far cry from understanding economics generally or monetary policy specifically.
The fear among many economists is that Trump will attempt to cage the independence of the Fed and subject decision-making about interest rates and open market operations (“OMO”) to political influences. This is a terrible idea given the adverse ripple effect it could have on the global economy.
Most people know the Fed for its critical function of setting the interest rate that member banks charge each other for overnight borrowing. This rate, known as the federal funds rate, becomes the benchmark for many other borrowing rates throughout the economy. Adjustments to the rate are used to heat up or cool down borrowing and concomitant economic activity. If the rate is set too low, an expanding economy can overeat and become inflationary. If the rate is too high, borrowing demand—and business activity—will contract, reducing inflation but potentially also increasing the risk of recession. (Currently, the Fed’s target inflation rate is 2.0%; the actual inflation rate is down to 2.4%, which allowed the Fed to cut recently the fed funds rate by 50 bps (“bips” or “basis points” = 0.50%)).
The Fed’s OMO comprises the sale and purchase of government securities for purposes of regulating the money supply. Along with the fed funds rate, OMO provide stability to the dollar.
Because the Fed is entirely independent of political influence—from both the White House and Congress—it can and does make interest rate and OMO decisions based on economic data—tons of data—not the whims and objectives of politicians, Democrat or Republican. This independence is essential for the stability of our financial system, which is the lifeblood of the economy. If the fed were to fall under the purview of the White House or Congress, political polling, not economic data would be the driver(s) of critical decisions regarding monetary policy.
This independence has far-reaching impact, given the role of the U.S. dollar in the global financial system and the size of the American component of the global economy. Undermine that independence and you undermine faith in the world financial and economic order.
Albeit a small minority, some economists advocate trashing the Fed and its counterpart central banks around the world; switching to some kind of unregulated cryptocurrency. Chalkboard theory can be deployed to show how this would work, but when the chalk dust cleared, the global financial system would be destabilized and economies plunged into chaos.
Trump has zero interest (no pun intended) in understanding the consequences of his seizing political control over the Fed and monetary policy. He views everything strictly through the lens of power—and ultimately, how he can translate that power to fool’s gold . . . his own, that is.
It’s been said ad nauseam, but repetition doesn’t diminish truth: a second Trump presidency would do tremendous damage to our nation and by extension, the world. By itself, ending the independence of the Fed would be a terrible price to pay for whatever good a person thinks could come of Trump II.
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© 2024 by Eric Nilsson
