Why Trump wants to fire America’s No.1 banker

Headlines in the US and in the financial and economic press across the world are dominated by a single question: can the president fire the head of the Federal Reserve? Will Trump sack Jay Powell, the head of the USA’s central bank, the person in charge of US interest rate policy, and whose job it is to control inflation? And why does Trump want to get rid of him?

Inflation is a horrendous problem. When it gets into the economic system, it’s impossible to get it out again without taking severe and often very painful economic decisions. During the inflationary surge of the late 1970s and early 1980s, the Federal Reserve put interest rates up to almost 20 per cent, in order to wring inflation from the system. The political consequences were enormous.

The extreme political significance of inflation and interest rate policy is why, on both sides of the Atlantic, inflation control is the responsibility of an independent body: in the UK the Bank of England and in the USA the Federal Reserve. These are the bodies that set rates, with the aim of controlling prices.

Trump’s tariffs have caused a huge degree of global economic uncertainty. Today the IMF downgraded its forecasts for US growth this year, from its January projection of 2.7%, to 1.8%. That downgrade was a direct result of Trump’s tariff plans.

And along with this comes the threat of inflation. Trump’s tariffs could force up prices in the United States: which is why Donald Trump is on yet another of his amazingly stupid and damaging rampages and why he is complaining about the current chairman of the Federal Reserve.

Trump appears to think that tariffs are a tax on foreigners – that if he introduces a tax on, say, China, that it will somehow amount to China paying the US large sums of money. He doesn’t seem to grasp that tariffs are a tax on Americans: that his policies will effectively raise prices on main street.

Trump’s frustration with Powell comes from the fact that Powell not only disagrees with him, but that the governor of the Federal Reserve has flatly contradicted Trump’s rosy economic picture. Powell has commented that Trump’s tariffs will have “significantly larger than anticipated… economic effects, which will include higher inflation and slower growth”. He had made clear that the Federal Reserve will not be cutting interest rates until it can more fully assess the impact of tariffs.

In typical Trump fashion, the president now wishes to fire Powell and replace him with a sycophant who will obediently talk up the economy and cut rates in the hope of stimulating an economic boom.

If Trump gets his hands on the controls, the credibility of the US economy will have been grievously undermined

However, one of the few people that the president cannot fire is Jay Powell, who as chance would have it was originally a Trump appointee. The problem is that the inability to fire Powell is based not on the constitution or statute but on a court case which set the precedent that the heads of supposedly independent federal agencies cannot be fired other than for “gross incompetence”.

As a result, Trump started ranting on social media that Powell is “always TOO LATE AND WRONG”, adding that “Powell’s termination cannot come fast enough!” Trump also told a reporter that: “If I want him out, he’ll be out real fast, believe me.”

It says almost everything you need to know about Trump that he cares nothing for the carefully developed and nurtured reputation of the Fed, the power and influence it gives the USA.

Not only is that desperately damaging to the US, even mentioning the idea is currently spooking the markets and weakening the US’s reputation for sound economic policy. If he were to oust Powell, Trump would not only have committed an economic outrage, but he would have given that power to all succeeding presidents, thus destroying a key safeguard within America’s most consequential economic institution.

If Trump gets his hands on the controls, the credibility of the US economy will have been grievously undermined and markets will go into freefall. It would raise the prospect of rising inflation combined with a politically-controlled central bank being forced to cut interest rates.

Suggested read: The end of the dollar

Erdogan tried this in Turkey – the consequences were disastrous. Inflation is at 38% and interest rates are at 46%. The Turkish Central bank is aiming for an inflation rate of 24% by the end of the year. This is what happens when stupid politicians take control of independent central banks.

The fate of the Turkish lire is one thing, but the dollar is the global reserve currency and so it matters to us all. Trump has already torn up the post war international order, as Ursula von der Leyen says “The West as we knew it, no longer exists”. Now he appears determined to tear up the economic structures on which US supremacy depends – attempting to push out the chairman of the Federal Reserve would be a step in that direction.

No one knows how much of America’s financial and economic power is based on the reputation and independence of the Fed, but we may well be about to find out.