IWe must save Private Powell. This is the mobilization of the moment, while rumors are growing about Donald Trump’s desire to fire the boss of the Fed, Jerome Powell, if he returns to power. During his term, Donald Trump considered attempting impeachment, but his advisers dissuaded him, believing that he did not have the power. According to the revelations of Wall Street Journala re-elected Trump might have no such qualms.
Worse, according to the daily, some of his advisors would even like to de facto eliminate the independence of the central bank. Fed chair candidates should agree in advance to discuss ” in private “ of their monetary policy with Mr. Trump, according to the imagination of his advisers.
The remark should not be taken lightly. The independence of the Fed, created in 1913 after the banking panic of 1907, has not always been assured, far from it. Its complex dual objective of full employment and price stability complicates its task. This last objective, moreover, was only formally explained during a reform in 1977, in the midst of an explosion of inflation.
When the Second World War broke out, the bank was under the control of the White House. To ensure funding for the war effort, it set interest rates at artificially low levels, around 2.5% over ten years. This policy extended after the war, in the midst of an explosion of unemployment, in a country haunted by the return to the depression of the 1930s. It caused a new surge in inflation in 1951 (21% at an annual rate in February 1951, 7.9% over the whole year) and it is the clash with President Harry Truman. The deal concluded with an agreement that laid the foundations of the modern Fed: artificial rate-fixing ended and the Fed did not monetize Treasury debt.
America prospered until the return of inflation with the Vietnam War from 1965, then the oil crises of 1973 and 1979. The Western world was still under the reign of Keynesianism, regardless of inflation as long as we have growth. He will have stagflation.
Real poison
The Chairman of the Fed, Arthur Burns (1970-1978), former advisor to Richard Nixon, pursued a lax policy to facilitate the president’s re-election in 1972. His successor, George William Miller, appointed in 1978 by Democratic President Jimmy Carter, worse: that year, the dollar collapsed by a third against the Deutsche Mark, the price increase reached 13.5% in 1979. Miller was exfiltrated from the Treasury by Carter, who appointed Paul Volcker in his place. Even before the election of Ronald Reagan in 1980, Keynesianism was over and monetarism was in place. Volcker lets the rates slide, which soar. The economy suffered two terrible recessions in the early 1980s, before inflation was overcome.
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