The Fed: a village under siege
With every day that passes, the US Federal Reserve is looking more and more like the Gaulish village in the well-known Asterix comic books. A village introduced in each album, until 2019, with the words“Gaul is entirely occupied by the Romans. Well, not entirely… One small village of indomitable Gauls still holds out against the invaders”. These days, Jerome Powell is playing the part of Asterix, while the invaders are MAGA, with Donald Trump in the role of Caesar.
The latest assault is the dismissal of Lisa Cook, governor of the US central bank, who has been accused of making fraudulent personal mortgage applications. Denying the allegation, the governor has brought the case before the courts, which must now decide whether she was fired ‘for cause’, the only valid basis the US president has for removing a member of the Fed. Jerome Powell, the Fed chair, was previously under pressure over the extravagant renovation work on the Fed’s Washington headquarters.
The Fed is the exception to the Supreme Court ruling handed down in May granting the US president greater powers over government agencies, as it is the only one whose board members cannot be removed by the president unless ‘for cause’ – although at present the term is ill-defined.
The Fed’s hard-won independence has come about gradually. It began with its separation from the Treasury in 1935 and was consolidated in 1951, with the end of government debt monetisation, a tool widely used during the Second World War to finance the war effort and subsequently the reconstruction. However, independence does not necessarily mean being completely free of government pressure, as demonstrated during the Johnson and Nixon presidencies in the 1960s and 70s.
Regardless of Donald Trump’s efforts to bring the Fed under his thumb, the timetable for the renewal of Fed members works in his favour, ashe will be able to appoint a new chair in 2026, which will increase his influence. Trump is bringing pressure to bear on the institution to cut interest rates and thus possibly reduce the borrowing costs of the US government, which suffers from a large deficit and is hugely in debt – even if the consequences might be disastrous. The situation in Turkey is a telling example. Erdogan has had the Turkish central bank under his control since 2019 and the economic repercussions came quickly: runaway inflation and massive depreciation of the Turkish lira – which has further increased the price of imported goods. The very same consequences that could burden the US economy if the Fed village were to be overrun by the MAGA invaders.