After weeks of anticipation on Wall Street and elsewhere, policymakers at the Federal Reserve, which is one of the few remaining independent agencies that hasn’t yet fallen under the control of Donald Trump, will meet in the coming days to set a key interest rate. Trump has recently renewed his attacks on Jerome Powell, the chair of the Fed, following a sharp slowdown in job growth throughout the summer. He has also demanded a bigger rate cut than Powell and his colleagues on the Federal Open Market Committee (F.O.M.C.), which holds eight scheduled meetings each year to determine monetary policy, are likely to deliver, though that is the least of his efforts to exert control over the central bank.
Last week, Senate Republicans moved to confirm Stephen Miran, the chair of Trump’s Council of Economic Advisers, to fill a short-term vacancy on the Fed’s Board of Governors. For now, Trump has backed off from his threats to fire Powell, whom he nominated in 2017 before turning against him shortly thereafter. But he is pressing ahead with his effort to oust another Fed governor, Lisa Cook, whom one of his minions, Bill Pulte, the director of the Federal Housing Finance Agency, has accused of mortgage fraud. Last week, a federal judge said Trump hadn’t “stated a legally permissible cause for Cook’s removal,” and allowed her to remain in her role. The Administration promptly appealed the ruling, asking a circuit court to allow it to forge ahead with Cook’s dismissal before the meeting, which starts on Tuesday.
Policy disputes between Presidents and the Fed aren’t new, though we are witnessing something unprecedented. Until now, the most contentious showdown between the White House and the Fed came in January, 1951, when President Harry Truman summoned the members of the F.O.M.C. to the White House for a dressing-down. Then, as now, the source of the dispute was the President’s demand for low borrowing costs, but the context was very different.
In April, 1942, shortly after the United States entered the Second World War, the Fed agreed to peg short-term rates at three-eighths of one per cent and long-term rates at 2.5 per cent. To enable the U.S. government to finance a huge expansion in defense spending, the Fed created large sums of money and used it to purchase Treasury bonds, an action that buoyed bond prices and kept their yields low. Large-scale monetary expansions are often associated with inflation, but wartime price controls helped keep price rises in check. In the postwar years, however, inflation picked up, and the United States’ entry into the Korean War, in June, 1950, heightened inflationary pressures. By the start of the following year, prices were increasing at an annual rate of about twenty per cent.
These developments alarmed Fed officials, many of whom wanted to raise interest rates to bring down inflation. In testimony on Capitol Hill, the Fed chairman at the time, Marriner S. Eccles, who had been appointed by Franklin D. Roosevelt during the Great Depression, described the interest-rate cap as “an engine of inflation.” But Truman, who had one eye on preserving the value of war bonds that many Americans had purchased, was determined to keep it in place. He convened the F.O.M.C. members, and argued that raising rates could jeopardize the financing of the Korean War and the global fight against Communism. The next day, the White House and the Treasury Department announced that the Fed had agreed to maintain its existing policy for the duration of the security emergency. But the members of the F.O.M.C. had agreed to no such thing.
When reporters from the New York Times and the Washington Post called Eccles, he told them this, and the outlets reported his comments without attribution. The dispute was now out in the open, and the Truman White House was shown to have misled the public. Eccles also released to the press an internal Fed memorandum that recorded the details of the meeting. As Eccles put it later on, “the fat was in the fire.”
For a month, the dispute escalated. Tense meetings were held. Various senators got involved. The Fed informed the Treasury that it was “no longer willing to maintain the existing situation in the Government security market.” Eventually, the White House and the Treasury backed down. The then Treasury Secretary, John W. Snyder, had been sidelined by an illness, so one of his top lieutenants, William McChesney Martin, negotiated a compromise with the Fed; the deal was finalized in early March. Under this agreement, which came to be known as the Treasury-Fed Accord, the central bank agreed to keep a key interest rate fixed until the end of the year, but it no longer committed to a permanent cap. Effectively, it was free to concentrate on fighting inflation.
Soon after, Truman appointed Martin as Fed chair, intending to have his own man in place. But, rather than catering to Truman’s desire for a cheap-money policy, Martin acquired a reputation as an inflation hawk. (It was he who likened the Fed’s role to removing the drinks when the party gets raucous.) Years later, according to an informative history of the dispute that was published in 2001 by the Federal Reserve Bank of Richmond, one of twelve regional reserve banks in the U.S., the two men ran into each other on a New York street; Truman looked at Martin, “said one word, ‘traitor,’ and then continued.”
After reading this history last week, I called up Jeffrey Lacker, an economist who was president of the Richmond Fed from 2004-17 and who also served as a member of the F.O.M.C. under Alan Greenspan and Ben Bernanke. (The voting members of the committee consist of seven Fed governors and five regional Fed presidents.) Lacker is a student of the Fed’s history, and a fervent believer in its independence. “Truman had to sue for peace when he was discovered to have lied to the press about the compliance of the F.O.M.C. with his desires,” he told me. “Whether such shaming is an effective mechanism in this climate is not so clear at all.”
I interpreted this statement as a diplomatic way of saying that Trump is utterly shameless, and that, in pursuing his goals, he is restrained by neither precedent nor embarrassing facts. (This is someone who was found guilty last year, in a New York civil court, of grossly inflating the value of his real-estate assets to obtain better loan terms, and here he is, accusing Cook of mortgage fraud.) That said, Truman was no pushover. As a Midwestern populist, he viewed the Fed and its allies on Wall Street with deep suspicion. Yet, the Fed was able to prevail over him. Lacker pointed to another reason that this was possible: “The crucial thing in 1951 was the relations that Eccles had behind the scenes with people in the Senate.”
Under the Federal Reserve Act of 1913, and later amendments to it, Congress exercises oversight over the Fed, its policies, and appointments to its Board of Governors. Although that relationship can sometimes be antagonistic, the central bank has long had powerful supporters in both parties on Capitol Hill and on its key committees. Since Trump launched his latest assault on the Fed, however, Republican senators have largely remained silent.
In an article published last year, Miran, Trump’s Harvard-trained nominee to the Fed board, called for “increased presidential oversight” of the board, and a clarification that “members serve at the will of the U.S. president.” At a recent nomination hearing, Miran vowed to make his own decisions at the Fed. But he has also insisted that, if he is confirmed to the vacant Fed post, which extends to the end of January, 2026, he will merely take a leave of absence from his job at the White House, breaking with the norm of cutting ties to avoid conflicts of interest. When I spoke on the phone with Senator Elizabeth Warren, the ranking minority member of the Banking Committee, last week, I mentioned that Ben Bernanke left the Bush White House to chair the Fed from 2006-14. “[Bernanke] actually left,” Warren replied, scornfully. “He didn’t keep a foot in the door with an option to return to his old job.” If Miran doesn’t resign from the White House, he would be “entirely dependent” on Trump, Warren added. And yet, despite all these warning signs, Republicans on the Senate Banking Committee nodded through Miran’s nomination with no defections. When the full Senate votes, a similar outcome seems inevitable. “If just four Senate Republicans had the courage to say no,” Warren said, “this craziness with the Fed would stop.”
For some old Washington hands, it may be a bit jarring to see the progressive firebrand Warren emerging as a prominent defender of the Fed. In the past, she has criticized the central bank for raising interest rates too sharply, failing to regulate banks adequately, turning a blind eye to dubious stock transactions by its officials, and not being sufficiently transparent or accountable. Miran, too, has called for more accountability. “But what Miran evidently means is accountability to one person—Donald Trump,” Warren told me. “I want a Fed that follows basic ethics rules more vigorously, that has an independent inspector general, and that is more transparent in its dealings. But I don’t want a Fed that elected officials—me or anyone else—can control.”
This is obviously what Trump wants, and it’s well within the bounds of possibility. If the Supreme Court buckles to him in the Cook case, as it has in many others, he will be able to nominate someone else to the Fed’s board, and the appointees from his first and second terms will be in the majority. Some Fed veterans are worried that the Trump appointees, at his instigation, could then exploit their position to fire all the regional-reserve-bank presidents, whose terms of office come up for renewal in February, 2026. In the past, these renewals, which take place every five years, have been a formality, but in theory they could be used to carry out a purge.
Would Republicans on Capitol Hill go along with a mass culling of regional Fed presidents? Based on their recent behavior, it’s not out of the question. Ultimately, the only binding constraint on Trump’s actions could be the reaction of investors, particularly purchasers of Treasury bonds. Lacker said a move against the regional presidents would likely be seen as “so drastic” that “it would trip some wires” in the sixty-trillion-dollar bond market. Back in April, markets tanked after Trump announced his “reciprocal” tariffs, and he backed off, at least in part.
The threat of a bond-market meltdown may be just about the only thing deterring a President who presided over the bankruptcy of multiple casino companies from gaining effective control of the entire U.S. economic-policymaking apparatus—fiscal, trade, and monetary. We aren’t there yet, but we are getting perilously close. ♦
