Source: Finance Association

Last month, local media in the US revealed a “big deal” — Republican presidential candidate Trump's allies are quietly drafting suggestions. If the former president wins the general election and comes to power for a second time, they will try to weaken the independence of the Federal Reserve and even essentially control the Federal Reserve.

In response to this, in a recent statement on Wednesday, the Biden administration clearly took the side of defending the independence of the Federal Reserve.

In a blog post published on the official website on Wednesday, the White House Economic Advisory Committee listed multiple sets of historical evidence, proving that central banks, which are constrained by politicians, have done a very poor job of implementing monetary policies in terms of economic effectiveness, while independent central banks are doing a better job in controlling inflation.

The White House Council of Economic Advisers wrote in its blog, “The Biden administration is deeply inspired by this period of history and will continue to unswervingly support central bank independence (CBI). History has shown more clearly that ignoring this lesson or reversing the hard-won progress of the past half century will have long-lasting and destructive inflationary consequences.”

The White House Economic Advisory Committee pointed out that research, theory, and evidence all show that the central bank's ability to implement monetary policy without political interference is a key component of its ability to control inflation.

The blog wrote that the independence of the central bank has strengthened the credibility of its policies, and this trustworthiness is also the key to maintaining long-term stable expectations. When credibility is influenced by politics, individuals, businesses, and other price makers are unlikely to trust the central bank's promises to reduce inflation, which in turn will cause inflation to rise. Former Federal Reserve Chairman Bernanke once explained, “Central banks affected by short-term politics are likely to be untrustworthy when promising low inflation, because the public will recognize the risk that monetary policy makers may be forced to pursue short-term expansionary policies inconsistent with long-term price stability.”

Currently, the “anti-inflation campaign” started by Powell along with most of the world's central bankers has been going on for two years. The US inflation rate (PCE price index) peaked at about 7% in mid-2022 and has since declined to 2.7%. However, the inflation target set by the Federal Reserve is 2%, and Fed policymakers have stated that they will not cut interest rates until they have greater confidence that the inflation rate will move towards this target.

According to news broke in the US media last month, Republican presidential candidate Trump's allies are quietly drafting proposals to weaken the independence of the Federal Reserve. They believe that the Fed should seek Trump's opinion on future interest rate decisions. Some of the drafts they have drawn up suggest that the Federal Reserve's rules and regulations should be reviewed by the White House and that the Treasury Department be used more strongly to counterbalance the Federal Reserve.

The team also believes that once Trump returns to the White House, he will have the right to dismiss current Federal Reserve Chairman Powell early during his tenure (before the end of his term as president in 2026).

Trump recently targeted US President Joe Biden, believing that it was he who allowed the US inflation rate to remain high, and expressed his belief that Powell would cut interest rates to help Biden run for re-election.

editor/tolk