The president of the United States has the authority to nominate and fire the governors of the federal reserve board, yet he is powerless to stop their steady rate increases, which could be the driving force that undercuts the rapid growth of the current U.S. economy.
Hello and welcome to America Daily. I’m your reporter, Arleen Richards.
Today on America Daily, Why the president of the United States can’t stop the Federal Reserve’s rate increases?
By the authority vested under the Federal Reserve Act, President Trump in November 2017, nominated Jerome Powell to become the 16th chairman of the Federal Reserve.
Confident in his choice, Trump expected Powell to support a growing economy with lower interest rates. Upon announcing his nomination, Trump boasted about economic milestones and placed full confidence in Powell to sustain a sound monetary policy. :35 – 1:42 https://www.youtube.com/watch?v=r2MylmQ19qE
Since taking the reigns from the previous Chair, Janet Yellen in February, Powell has been raising the interest rate.
But Trump says the new Chair is moving too fast, calling the Fed his biggest threat. While Trump recognizes that the Fed is an independent body, he has been breaking the tradition of previous presidents by publicly complaining that the increases are “crazy” and “a threat” to a growing economy.
Despite the President’s unconventional complaints and some implication of regret for choosing Powell, he doesn’t have a clear cause to fire him.
To understand why the president can’t influence the Federal Reserve’s decisions, one has to know the history of how and why the Fed was born.
According to a working paper prepared by the Hutchins Center, a think tank on monetary policy, a 1907 earthquake in California drew gold out of major money centers, resulting in a recession. A panicked congress sought to overhaul the nation’s monetary system but couldn’t agree on the terms.
President Woodrow Wilson proposed the creation of 8 to 12 reserve banks run by appointees of private bankers, but supervised by a single central board of Presidential appointees. Wilson’s vision formed the basis of the Federal Reserve Act of 1913.
However, Wilson’s proposal caused a turf war, which led to Congress revoking Wilson’s vision and placing centralized authority in the Board of Governors, which is the Federal Reserve we know today.
The 12 quasi-private Reserve banks lost their autonomy, but sustained their ability to operate independently as corporations. By placing central authority in the Board of Governors, an independent agency of the federal government.
As an independent agent, the Fed exists outside of the federal executive departments and therefore is not subject to the president’s control. Its decisions are not affected by politics.
Typically the Fed would increase interest rates to fight inflation. Higher rates keep the economy from overheating and causing inflation. But, they also have the effect of slowing economic growth when pushed high enough or even causing a recession. Powell explained in September that the rate increases indicate a healthy economy.
There does appear to be a slow-down in sight with more increases expected in December.
But, for President Trump, keeping the interest rates lower and making incremental increases at a slower pace will support his tax overhaul plan, which so far has succeeded in creating the economic growth engine Trump enjoys today. Trump’s tax cuts generated more federal revenues even after adjusting for inflation and population growth.
If the Fed continues to raise rates, economic growth and job creation could be considerably slower as Trump heads into his re-election campaign for 2020.
That’s the extended report for today. Thank you for listening to America Daily.