London
—
Federal Reserve Chair Jerome Powell’s comments at Jackson Hole Friday hinting at the possibility of an upcoming interest rate cut should have been music to President Donald Trump’s ears.
Yet days after Powell delivered one of the most important speeches in the financial calendar, the Fed chair was digesting news of the latest twist in a simmering battle between the central bank and the Trump administration, as the president said he was firing one of its governors, Lisa Cook.
The first-ever attempt to fire a Fed governor, alongside Trump’s public hammering on Powell, represents clear threats to the 111-year-old central bank’s independence not seen since the Nixon administration. Investors are speculating on how far Trump might go, what might result from an ensuing legal fight and the according impact on markets, the dollar and US debt.
A White House spokesperson told CNN that economic data show Trump’s policies have brought down inflation.
“The president has made his view clear that it’s high time for the Fed to respond to this objective fact by cutting rates, delivering needed interest rate relief to American families and supporting employment and economic growth,” the spokesperson said.
Trump’s motivations for attempting to influence the Fed — a more favorable interest rate environment that encourages spending and GDP growth — are not new, and nor are the likely consequences if he gets his way.
“It’s really important for Americans to understand how dangerous this is,” former Fed Chair and former Treasury Secretary Janet Yellen told CNN’s Jack Tapper on Thursday.
Turkey and Erdogan
Turkish President Recep Tayyip Erdogan provides a cautionary tale in strongman leaders attempting to intervene in monetary policy. Erdogan’s unconventional view that the way to tame inflation was to lower interest rates has, unsurprisingly, led to spiraling inflation and eventually a collapsing Turkish lira.
Within the space of 20 months between July 2019 and March 2021, Erdogan fired Murat Cetinkaya, Murat Uysal and Naci Agbal as chiefs of Turkey’s central bank.
“Since 2018, whenever a central bank governor decided to increase the interest rates or hold them up for longer than Erdogan wanted, then Erdogan would essentially sack them,” Adam Michalski, a research fellow at the Center for Eastern Studies, told CNN.
Around the time of Agbal’s dismissal in March 2021, Turkey’s inflation rate stood at 16.7%. By October 2022, the rate had peaked at 85.5%. Those price rises precipitated repeated cuts to Turkey’s base interest rate, falling to a low of 8.5% in February 2023.
The Turkish lira was propped up through much of that turbulence through the use of foreign currency reserves, which put Turkey on the brink of a debt crisis. The country has spent an estimated $60 billion attempting to support the lira.
Public frustration at inflation forced Erdogan into more conventional monetary policy in 2023. Turkey increased interest rates to a peak of 50% in March 2024, and they currently sit at around 43%. Mortgage rates on Turkish homes are now above 40%. The removal of support for the lira caused the currency to plummet, putting more pressure on prices.
But that doesn’t mean Erdogan is done meddling with the central bank.
“This is still a political decision from Erdogan,” Michalski says. “You never know when Erdogan will decide: ‘the economy is stabilized enough, let’s return to that controversial policy of low interest rates.’”
While soaring inflation, a plummeting currency and high interest rates have affected Turkish businesses and their ability to do business overseas, it’s the poorest who have been hit hardest.
Around 9 million Turkish workers earn the minimum wage of 22,104 TRY net per month, equivalent to about $538.
“For them, life hasn’t improved for the last decade,” said Michalski.
Argentina has had a similar experience, said Hans-Dieter Holtzmann, project director at the Friedrich Naumann Foundation.
“At the end of the day, it depends on who is the Argentinian president, and what is his priority and his key economic interest,” Holtzmann told CNN.
Indeed, chiefs of the Central Bank of Argentina (BCRA) are traditionally removed from their post following a presidential election in Argentina. As a result, since 2013 the BCRA has had eight chiefs. In the same period, the United States has had three.
For much of the 21st century, the BCRA has acted to support the Argentine government’s financial goals, which has largely been the financing of a deficit.
The central bank printed money to finance Argentina’s deficit, leading to hyperinflation that peaked at 292% in April 2024.
Since populist Javier Milei was elected in 2023, the Argentinian president has held off on an election pledge to shut down the central bank and instead supported the BCRA’s target of price stability.
“Milei realized soon that the independence of the central bank is fundamental to preserve not only monetary stability, but also currency stability,” said Davide Romelli, an associate professor in the Department of Economics at Trinity College Dublin who tracks independence levels across 155 central banks.
A focus on price stability, alongside austerity and currency reform, has proved remarkably effective. Inflation declined to 36.6% in July. In the same month, Moody’s upgraded its credit rating for Argentina, increasing investor confidence in holding the government’s debt.
Holtzmann has drawn clear lessons from the disruption in Argentina.
“It is a lesson that can be started from Argentina, that if there is no clear course for the central bank on doing their analysis, on combating inflation, that you quickly can burn the reputation (of a country), which can be a downward spiral. Then your country risk goes up and you suddenly have no capital market access anymore.”
The Fed has dealt with threats to its independence in the past, though nothing on the level of Turkey and Argentina.
In 1970, President Richard Nixon fired Fed Chair William McChesney Martin in place of Republican loyalist and former presidential counselor Arthur Burns.
Burns and the Fed expanded the money supply in the US economy in an election year following a recession under the Lyndon B. Johnson administration. There isn’t definitive evidence that Burns engaged in monetary expansion at the behest of Nixon, but the macroeconomic fallout of the policy is clearer.
“Regardless of the ultimate source of Arthur Burns’s motivation, his actions as Federal Reserve Chair helped to trigger an extremely costly inflationary boom–bust cycle,” Burton A. Abrams, Professor Emeritus of Economics at the University of Delaware, wrote in 2006.
Inflation rose from 3.3% in 1971 to 11.8% in 1974. OPEC supply cuts for oil, the removal of government wage and price controls and global shocks to food supply all take some of the blame.
However, “there is lots of anecdotal evidence that the high inflation of the ’70s was partially due to the fact that Burns never acted so strongly in tightening monetary policy,” said Trinity College’s Romelli.
Investors remain unconvinced that Trump will take the risk of firing Powell before his term ends on May 15 next year.
Romelli said he thinks what will “completely change the rule of the game” is if Trump decides to fire Cook even if a judge clears her of fraud. A JPMorgan note from Tuesday said that the successful firing of Cook could also leave other governors open to dismissal.
“What we know from the literature is that every time there is a perceived pressure or a lowering of the degree of central bank independence in a country, typically expectations about inflation increase, and so households and forecasters predict future higher inflation, which can have a detrimental effect,” said Romelli.
A White House spokesperson told CNN that Trump determined there was cause to remove a governor who “was credibly accused of lying in financial documents from a highly sensitive position overseeing financial institutions.
“The removal of a governor for cause improves the Federal Reserve Board’s accountability and credibility for both the markets and American people.”
George Saravelos, global co-head of FX Research at Deutsche Bank, said he thinks if a repeat of the 1970s happens in the United States, the fallout would be much worse.
The United States is both spending more than it’s borrowing and importing more than it’s exporting, known as a twin deficit, while it owes more than it owns abroad. Foreign investors also hold huge amounts of US assets, which they could be encouraged to sell during economic disruption.
“All these ingredients argue for significantly greater global disruption,” Saravelos wrote in an August note.
The Fed has the advantage of being a historically stable institution, propping up investor confidence even amid recent disruption. The legal safeguards on the Fed through the Federal Reserve Act of 1913 give it much more protection than central banks have in Argentina and Turkey. Concrete changes to investors’ perception of the Fed’s independence, though, can still do serious damage.
This is already starting to play out. Carola Binder, associate professor of economics at the University of Texas at Austin, sees politics playing into coverage of the Fed much more heavily than in the past.
“If they cut by 25 basis points instead of 50, people are going to say, ‘Oh, they were doing that to go against Trump. On the flip side, if they decide they do need to cut by 50 points, because the data tells them to, some people are then going to say, ‘Oh, they were caving to the president’s pressure.’
“In some respects, it puts them into a no-win situation, because whatever they do, even if it is based on the data, that’s going to be viewed as a political decision,” Binder told CNN.
The other risk is that Trump’s actions inspire populist leaders elsewhere. Reuters reported comments from several central bankers who fear that the reduction of central bank independence in the United States would cause similar moves elsewhere, a development that would create major harm to the global economy.
“It’s not clear that we’d obviously imminently become another Turkey,” Binder said. “But I think… it’s easy for people to become distrusting of the Fed, and a lot harder for them to get that trust back.”