How the Fed Stifles the Economy

Federal Reserve Board (Fed) Chairman Jerome Powell and President Trump have engaged in a public imbroglio regarding reduction of the federal funds rate. The media has goaded Trump to fire Powell. To date Trump hasn’t taken the bait but the chairman and other Fed governors can be “removed for cause by the President.” The Fed, like the rest of the federal bureaucracy, is part of the executive branch. Trump recently fired Fed governor Lisa Cooke for making false statements on personal mortgage agreements. Ms. Cooke has refused to leave her job and is challenging her removal in the courts.

There are good reasons to reduce interest rates. There are also reasons why presidential interference is a bad idea. While President Trump is well versed in economic matters, most presidents aren’t. Americans would have been horrified if Joe Biden had taken it upon himself to personally micromanage the economy.

Trump correctly asserts that higher interest rates cost taxpayers money. This year the U.S. will spend more than $1 trillion to finance the interest expense on the national debt which exceeds $37 trillion. The Fed sells treasury bonds to finance the interest expense. If bondholders earn 4% interest on the $1 trillion expense, $40 billion will be paid to bondholders each year. If bondholders earn 1% interest on $1 trillion, the interest expense will be $10 billion each year. Lower interest rates will certainly save taxpayers money. Lower rates also make financing homes, consumer goods, and business investment more affordable.

The Fed is advertised as an independent board with a “dual mandate… with the aim of moving the economy toward maximum employment and stable prices.” There is concern that President Trump’s demand to reduce interest rates jeopardizes the Fed’s independence. The Fed was created by Congress which also legislated the “dual mandate” in 1977. The Fed’s Board of Governors are nominated by Presidents and placed in office with the consent of the Senate. The Fed is part of the government bureaucracy directed by politicians. The independence of the Fed is an illusion.