Trump's Push to Remove Fed Chair Risks Undermining Central Bank Independence

President Trump has escalated his efforts to push for lower interest rates, a strategy that carries significant risks and may ultimately backfire.

For several months, Trump has persistently urged the Federal Reserve to adopt a looser monetary policy and has called for Fed Chair Jerome Powell's resignation. Recently, the administration appears to be pursuing a novel and potentially lawful approach: preparing grounds to dismiss the Fed chair for cause.

Allowing the central bank to be viewed as a political instrument poses clear dangers, a lesson evident from similar scenarios abroad. Even if the U.S. economy and financial markets are resilient enough to absorb some reputational damage, the likely consequences include increased long-term borrowing costs for consumers and businesses, along with a depreciated currency that could fuel inflation.

Consider the examples of Hungary and Turkey, where governments grappling with budget deficits, inflation, and growth objectives have compromised their central banks' autonomy to align monetary policy with political goals. This typically involved lowering interest rates to stimulate economic activity.

Hungary's central bank gained independence in 1991, but over the past decade and a half, the government has repeatedly sought to influence its decisions. This includes increasing the number of voting members on the monetary policy council. Following a 2011 constitutional amendment that weakened the bank's independence, major credit rating agencies downgraded Hungary's sovereign debt to junk status, driving borrowing costs upward and causing the forint to decline.

Despite these setbacks, the Hungarian government has continued its efforts to exert control, most recently through legislation proposed by Prime Minister Viktor Orban's Fidesz party to further expand the council from nine to eleven members, adding another deputy governor appointed by Orban himself.