President Donald Trump has been a frequent critic of the Federal Reserve’s monetary policy. As a candidate in 2016, he suggested that then-Federal Reserve Chair Janet Yellen was keeping interest rates low to boost his opponent, Hillary Clinton’s, odds of being elected, and said Yellen should be “ashamed” of what she was doing to the country. (He opted not to renominate Yellen for another term after his election.) During his first term in office, President Trump grew increasingly critical of the new chair, Jerome Powell, as the Fed sought to normalize after nearly a decade of low rates. In 2019, President Trump called on Powell to reduce the Fed’s target rate to “ZERO, or less,” and suggested that the Fed was “Our most difficult problem…not China.”
While President Trump ultimately came around and congratulated Powell and the Federal Reserve in March of 2020 when the agency slashed interest rates to near zero and launched massive liquidity programs in response to the COVID pandemic, the commander in chief has once again taken issue with Powell since moving back into the White House, with Trump’s Director of the National Economic Council last week suggesting that the president is considering whether to fire Chairman Powell. (President Trump indicated yesterday he won’t do so.)
With the markets see-sawing based on President Trump’s inclinations toward Fed monetary policy generally and Fed Chairman Jerome Powell specifically, this week we’ll take a look at the history of the Federal Reserve’s independence, and the long, consistent history of presidents trying to exert influence on U.S. monetary policy.
The Federal Reserve Wasn’t Always Completely Independent
The Federal Reserve was established by Congress in 1913 to provide a central banking system that could operate independently of political influence, particularly in its control over monetary policy. The original conception of the Federal Reserve System was meant to continue the spirit of the “independent treasury system” that existed in the pre-Fed era. That system assumed that the U.S. Treasury would store its gold and assets in its own vaults to avoid unduly influencing the markets for credit and money. The Fed-era system was intended to maintain independence from political pressure to continue this tradition of avoiding undue market influence.
But that goal proved difficult to fulfill in practice.
As the Federal Reserve Bank of Richmond noted in 2009, “a lack of independence was characteristic” for most of the first four decades of the Federal Reserve’s history. The 1913 act that created the Fed made the Secretary of the Treasury and the Comptroller of the Currency members of the Fed’s Board, and the Secretary of the Treasury presided over all Federal Reserve Board meetings. The Fed lacked even its own offices – its board held meetings in the Treasury building right next door to the White House.
Just a few years after its conception, the Federal Reserve’s main function was to finance the United States’ involvement in World War I by lending money to banks to purchase bonds from the federal government. During the period between the two world wars, Fed policy was driven almost completely by political influence. After Franklin Roosevelt became president in 1933, he assumed emergency powers that explicitly took the United States off the gold standard. Congress would later that year mandate that the Fed issue “reserve notes” not backed by gold, subverting the agency’s ability to manage monetary policy independently. From the Great Depression through World War II, the Fed closely cooperated with the Treasury Department to finance government programs and debt, effectively subordinating its policy tools to fiscal needs. The most notable example came during World War II, when the Fed agreed to cap interest rates to once again keep government borrowing costs artificially low as a means of financing the U.S. war effort. Throughout this period, Congress and the Executive Branch exerted significant influence over monetary policy, despite Congress’ intention that the Fed be removed from such pressure.
A Declaration of Independence
By 1950, the Fed believed that continuing to peg interest rates was fueling inflation. But Treasury Secretary John Snyder, a close ally of President Harry Truman, insisted that interest rates remain fixed to keep government borrowing costs low. The disagreement reached a boiling point in early 1951.
President Truman, alarmed by rising rates, summoned Fed officials to the White House in January 1951, urging them to continue supporting the Treasury’s borrowing needs. The Fed resisted, leading to a public showdown. The standoff culminated in Chairman McCabe’s resignation, and Truman replaced him with William McChesney Martin, who had previously worked at the Treasury. While Truman as hoping that Martin would support the administration’s intended policy of lowering rates, he surprised many by siding with the Fed’s independence once in office.
The tension between the Fed and the Truman administration as settled on March 4, 1951, when the Federal Reserve and the Treasury Department issued a joint statement, now known as the Fed-Treasury Accord, which formally ended the Fed’s obligation to maintain a fixed interest rate on government bonds. Under the accord:
- Treasury acknowledged that the Fed would no longer peg interest rates to support Treasury financing.
- The Fed regained full control over open market operations, allowing it to raise rates to combat inflation without Treasury influence.
- The administration agreed to establish a clear institutional boundary between the Treasury (responsible for fiscal policy) and the Fed (responsible for monetary policy).
The Accord was a watershed moment for the Fed’s independence, and formed the basis of the idea, still held today, that the Fed be immune from political influence when setting monetary policy. Fed Chair Martin, who went on to lead the agency until 1970, famously said the central bank’s job was to “take away the punch bowl just as the party gets going,” a reflection of the Fed’s newfound responsibility to act counter-cyclically, even when it meant unpopular decisions.
Presidential Attempts at Influencing the Fed Persisted
Despite the 1951 Accord, many a president continued to bemoan the political impacts of Fed monetary policy and sought to convince the agency to undertake a different path that might provide a political boost.
President Lyndon Johnson summoned Fed Chairman Martin to Johnson’s Texas ranch in 1965 shortly after the Fed raised interest rates to combat inflation. President Johnson infamously berated Martin, shouting, “My boys are dying in Vietnam, and you won’t print the money I need.” Tape recordings of phone calls made by President Johnson from the White House to Martin, released years after Johnson’s presidency, revealed a constant pressure campaign from LBJ towards the Fed chairman seeking a more accommodative monetary policy. Although Martin did not fully cave, the Fed’s monetary policy remained relatively in line with Johnson’s wishes during his presidency.
President Richard Nixon privately pressured then-Fed Chair Arthur Burns to keep interest rates low ahead of the 1972 election. Burns complied, which economists generally now agree contributed to the inflation of the 1970s.
It wasn’t until President Gerald Ford in the mid-1970’s generally avoided direct pressure on the Fed that the current view of Fed independence became an established precedent. Ford’s successor, President Jimmy Carter, did not interfere with Fed monetary policy, despite high inflation, after appointing Paul Volcker as Fed chairman in 1979. Volcker dramatically raised interest rates to curb inflation, causing a recession that likely contributed to Carter’s defeat in 1980—but the Fed’s independence remained intact.
Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, and Barack Obama all generally allowed the Fed to pursue monetary policy objectives absent political pressure, though George H.W. Bush later blamed Fed chairman Alan Greenspan’s reluctance to cut rates during the early 1990’s for his failed 1992 re-election bid.
Can The Fed Remain Independent Under President Trump?
Even if President Trump opts not to try to fire Fed Chairman Jerome Powell – and there are real legal questions as to whether or not he could – there is ample evidence to suggest that President Trump’s public criticisms themselves could have an influence on the Fed’s monetary policy decisions.
Econofact, a nonpartisan publication that covers U.S. economic developments, found significant evidence, based on “an analysis of the personal interactions between U.S. presidents and Federal Reserve officials,” since 1933, “that there were times when pressure from the president influenced the Fed’s activities at the expense of price stability.”
In 2019, the Fed did begin lowering interest rates after having raised them several times in 2017 and 2018. These rate cuts aligned with President Trump’s demands, leading some to speculate that his pressure campaign had succeeded. However, Fed Chair Powell and other Federal Open Market Committee (FOMC) members consistently stated that their actions were driven by economic indicators—especially slowing global growth, trade uncertainty, and muted inflation expectations—not political pressure. Then, of course, came COVID, which drove an accommodative monetary policy championed by President Trump.
With President Trump once again insisting that the Fed lower interest rates, this time amidst a markedly volatile stock market and a potential international trade war, will Fed Chair Jerome Powell and FOMC members continue to resist political influence? Only time will tell.