For more than a generation, central banks have been given independence from the political class to set interest rates at an appropriate level with the aim of keeping inflation in check.<\/p>\n
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Donald Trump \u2013 treating institutions liked the Federal Reserve like a golf course acquisition.Credit: Getty<\/p>\n
Trump seems to be treating the Fed more like a possible golf course acquisition. Just something else to control and laud over everyone else.<\/p>\n
But it comes with tremendous risk.<\/p>\n
Two months ago, University of Maryland economist Thomas Drechsel released research into the economic fallout from the interactions of American presidents with the Federal Reserve, covering the period 1933 and 2016.<\/p>\n
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Federal Reserve chairman Jerome Powell with fellow central bank governor Lisa Cook in June.Credit: AP<\/p>\n
He found that political pressure to cut interest rates \u201cincreases the price level strongly and persistently\u201d and \u201cdoes not lead to positive effects on real economic activity\u201d.<\/p>\n
The most egregious example of the president heavying the Fed came in the 1970s when Richard Nixon put the greasers on then Federal Reserve chairman Arthur Burns (appointed by Nixon).<\/p>\n
According to Drechsel, an increase in presidential pressure on the Fed half as much as Nixon imposed on Burns would lift prices by 7 per cent.<\/p>\n
Monash University economist Zac Gross said what is playing out in the US is dangerous for American consumers and businesses, who could face much higher inflation.<\/p>\n
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\u201cIf it\u2019s just one person with an illegal sacking then there are other protections in place. But it\u2019s also one more step towards a very big risk that leads to epic levels of inflation, far higher than we saw during the pandemic,\u201d he said.<\/p>\n
For those who may have forgotten, American inflation peaked at 9 per cent in 2022 (in Australia, it reached 7.8 per cent). It was one reason why Joe Biden\u2019s presidency struggled and weighed on Kamala Harris\u2019 campaign to defeat Trump.<\/p>\n
Australian economist Justin Wolfers, based at the University of Michigan and who knows Cook, said his worry was not just the attack on one Fed governor but the economic path.<\/p>\n
He said by trying to bring interest rates down far below what any economist believes is reasonable, Trump\u2019s endgame is becoming clear.<\/p>\n
\u201cIf he succeeds, the next chapter will involve the world learning more about \u2018fiscal dominance\u2019 which is a fancy word for artificially keeping rates low to keep interest payments on government debt low,\u201d he told this masthead.<\/p>\n
\u201cMy guess is that\u2019s the end goal. It\u2019s also a recipe for inflation, and possibly hyperinflation.<\/p>\n
\u201cThis is a dangerous road. And every day one feels a little less confident that Trump will heed the warnings of Wall Street not to go this far.\u201d<\/p>\n
Westpac chief economist and former RBA assistant governor, Luci Ellis, said at this stage it appeared financial markets were shrugging off Trump\u2019s social media sacking of Cook, although there are signs of disquiet.<\/p>\n
The spread between interest rates on 30-year and 10-year American government bonds are spreading, normally associated with concern about the economy. In this case, there\u2019s also the added worry about American government debt, which is at a record $US37.3 trillion and growing.<\/p>\n
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