Trump’s push for rate cuts risks politicizing Fed, JPMorgan warns

According to the JP Morgan Research Memorandum, President Donald Trump’s efforts to pressure the federal reserve in reducing interest rates may risk undermining the independence of the central bank, which raises the risk of inflation or politically affected monetary errors.

Trump has repeatedly urged the central bank to reduce interest rates by three points to enhance the economy and reduce the cost of America’s debt service, which is more than $ 36 trillion. He suggested on several occasions that he may try to launch the Federal Reserve Speaker Jerome Powell, just to decline and repeat his calls to reduce rates.

Trump has admitted this week that he discussed the shooting of Powell at a meeting with Republicans in the House of Representatives, but he told the reporters that he did not think he would advance with this plan.

Michael Ferrolly, the chief American economist at JP Morgan, wrote in a note on Wednesday that with regard to the possible Powell removal, “the immediate crisis may have passed, although we are doubting that we have completely finished this epic.”

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Feroli pointed out that federal law prohibits the removal of a member of the Federal Reserve, with the exception of “for the reason”, which is usually considered to cover cases of bad violations or shortening duty, instead of political differences on interest rate levels.

“The reason that is discussed is to overcome the costs in renewing the main building at the Federal Reserve in Washington, DC. It is difficult to know where this can happen because it does not seem to be a historical precedent to determine the limits” for the reason “for” independent agency manager. ”

The Supreme Court ruling recently allowed the Trump case against Wilkox to the president to remove a member of the National Labor Relations Council, which he had “for the reason.” However, the referee referred to the Federal Reserve as a separate issue and its advantage as “a unique, semi -special entity”, which can protect the central bank rulers from ending the will.

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President Trump appointed Powell as head of the Federal Reserve lecture in 2017, although he has repeatedly criticized him in the years. (Saul Loeb / AFP via Getty Images / Getty Images)

The efforts made to remove Powell or reduce his role as head of the Federal Reserve Council can weaken the independence of the Central Bank, which can shake the confidence of financial markets in US monetary policy if it becomes more likely to have political influence.

Feroli explained that the economists “generally believe it is useful to remove monetary policy from the political session” because “the short time horizon of electoral evaluation can seduce the political policy makers directed politically to try to motivate the economy even when it is inappropriate from a long -term perspective.”

For example, low interest rates can stimulate economic activity and increase inflationary pressures in the economy, and therefore reduce rates when inflation rises or a rise may lead to increased price growth.

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The President of the Federal Reserve Powell faced questions about the project to renew the central bank’s headquarters. (Douliery / AFP photography via Getty Images / Getty Images)

Economic research from all over the world has found that central banks are more successful in enhancing stable prices and low inflation when they have greater political independence, while the United States record during periods with clashes between the president and the central bank tends to high inflation.

“International evidence indicates that the central banks that have more political independence tend to enhance low and stable inflation. Closer to the home, the historical record indicates that political intervention contributed to the poor monetary policy in the late 1960s and early seventies, with unsuccessful consequences for inflation developments,” he wrote in reference to the efforts made by Johnson and Nixon in his management in the field of option.

In the current context, Feroli said that undermining the independence of the Federal Reserve can increase the risk of high inflation in addition to increasing interest rates on US national debt to calculate these risks, which would exacerbate US financial challenges.

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