As I’m sure you are aware, President Trump has been openly critical of the Federal Reserve raising interest rates. Earlier this year in a press conference Mr. Trump said, I think the Fed is making a mistake. They’re so tight, I think the Fed has gone crazy.”
In a later interview with Fox News, he reiterated his disappointment, “The Fed is going loco, and there’s no reason for them to do it. I’m not happy about it.” The president has had other negative remarks about the Fed, making it clear that he is not happy about monetary policy.
You may recall that it was Trump himself who appointed the current Fed Chairman, Jerome “Jay” Powell, to replace Janet Yellen back in February. When asked recently if he would replace Powell as the Fed chief, which he can do, Trump side-stepped the question.
In October, President Trump even pinned the blame for the recent stock market downturn on the Federal Reserve and Powell specifically. He pointedly slammed the Fed’s decision to continue gradually raising interest rates to prevent what Trump himself has touted as the “Best Economy & Jobs EVER” from overheating.
The reason I bring up the issue of President Trump criticizing the Fed is this. If you listen to the mainstream media, you would think that Trump is the only US president in modern history who has openly criticized the Fed in public. This is not true, as I will discuss below.
But first a little background. The Federal Reserve is the central banking system of the United States. It was created in late 1913, with the enactment of the Federal Reserve Act, after a series of financial panics led to the desire for central control of the monetary system in an attempt to alleviate financial crises.
The Federal Reserve has always been considered an independent, non-political agency that is generally not greatly influenced by political leaders, or even the president. While the president does appoint the Fed Chairman – with congressional approval – it is widely believed that presidents don’t try to control the Fed and its policy decisions.
So, the mainstream media would have us believe that Trump’s open criticism of the Fed, and its current policy of raising interest rates, is unprecedented. But that’s just not true. Many past presidents have criticized the Fed. I have to admit that I didn’t know this until recently, and that’s why I’m bringing it to your attention today. You may not have known it either.
I don’t want to bore you with too many details, but the government’s influence on the Fed goes back a long way. Here are a few examples.
During World War I, President Woodrow Wilson and Congress strong-armed the newly created Fed into buying war bonds to help finance the war effort, which led to a bout of severe inflation.
During the Great Depression, President Roosevelt didn’t hesitate to assume greater control over monetary policy from the Fed. Roosevelt repeatedly lobbied Congress to grant him greater authority over monetary policy as part of his controversial campaign to devalue the dollar, move toward a managed currency and made it illegal for the public to hold gold.
Fast forward to World War II when the Fed was urged again by President Roosevelt to finance wartime deficits, buying up billions of dollars in government bonds to stabilize interest rates.
Fast forward again to 1970 when Richard Nixon was president. Nixon, if you recall, usurped the Fed and took us off the gold standard. This led to wildly higher inflation and the worst “misery-index” ratings in US history. Inflation soared to double digits, and unemployment remained high for much of the decade.
Numerous presidents before and since Nixon have tried to influence Fed monetary policy in significant ways. I could go on with examples, but I think you can clearly see that Donald Trump is definitely NOT the only US president to try to exert political influence over the Fed, as the media would have us believe.
The point is, Trump’s foray into being an armchair economist and a critic of the Fed may be ill-advised. But despite the outrage many media pundits have expressed over his remarks, this is far from the first time a sitting president has acted in a way that might undermine the Fed’s independence.
The real lesson we should understand is that Trump’s smack talk against the Fed is small potatoes compared to the actual politically-motivated interventions into monetary policy many of his predecessors have taken. And the Fed has been bowing to presidents’ political pressure almost since its founding.
As I said at the beginning, even I was not aware that past presidents have been so critical of the Fed. The media seems to want us to think Trump is the only one. That’s why I want my clients and readers to know this is simply not true. Now you do!
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