President Trump is floating once again the idea of saying goodbye to the president of the Jerome Powell Federal Reserve, apparently in objection to excessively high interest rates. But this debate is not a monetary policy. It is a power set to subordinate the United States Central Bank to the fiscal needs of the Executive Branch and Congress. In other words, we have a “fiscal domain” textbook in our hands, and that always ends badly.
I am not a animator of Powell. During the Covid-19 pandemic, he enthusiastically supported all stimulus packages, regardless of their size or purpose, as if these did not participate in compensation. Where were the calls of “Independence Fed” then? And where were the fiscal restriction calls after the emergency ended?
Powell did not anticipate the worst inflation in four decades and repeated the absurd statement that it was “transitory” even when the growing evidence showed the opposite. He blamed the interruptions on the offer side long after the ports had reopened and the goods were moving.
And as inflation was stubborn, Powell delayed the increase in interest rates, possibly to protect the driving administration from the tax consequences of the debt in which he was accumulating, beyond the point where a monetary adjustment was needed.
If this were not the government's world, where failure can be rewarded, and if there had been a more obvious alternative, Powell would not have been invited to return for another term. But it was. And so, Trump's pressure campaign to end Powell's mandate prematurely is dangerous.
I understand why with the budget deficits that exploit and the debt service costs increase, the president wants lower interest rates. That would make the cost of its own fiscal agenda look more tolerable. Trump probably believes that he is justified because he believes that his tax cuts and deregulation are about to stimulate great economic growth.
Without a doubt, some growth will occur, although the effects of deregulation will take time to arrive. But the profits could be flooded by the negative consequences of Trump's rates and erratic tariff threats. No matter what, new growth will not lead to sufficient new tax revenues to escape the need for the government to ask for more borrowed. And the more the government takes, the more intense the pressure on interest rates will be.
One thing is safe: the pressure that Trump and his people exert on the Fed is an impulse for fiscal domain. The executive branch wants to use the Central Bank as a tool to accommodate the frenzy of the reckless loans of the government. Such political control of a central bank is a distinctive seal of failed monetary systems in weak institutional environments. The story shows where that always leads: to inflation, economic stagnation and financial instability.
Until now, Powell is resisting cutting rates, hence the flood of insults and shooting threat. But now it is not the right time to play with fire. Bond yields Last year it increased last year when investors considered the scale of American loans. They crossed the 5% Threshold again. Moody's even stripped The government of its precious AAA credit rating. The lowest interest rates of the Fed, especially if they are considered the result of raw political pressure, could further decrease the charm of the United States Treasury bonds.
While Fed can temporarily influence interest rates, especially in the short term, it cannot cancel the long -term fears of inflation, economic slowness and political manipulation of monetary policy promoted by an unsustainable fiscal policy. That's where trust matters, and trust is eroding.
That is why markets demand a premium for funds provided to a government that is now $ 36 billion In debt and shows no intention to decelerate. But it could get worse. If the average interest rate of the US debt. UU. It rises from 3.3% to 5%, interest payments could be raised from $ 900 billion to $ 2 billion per year. That would make the debt service very much the largest article in the federal budget: more than Medicare, Social Security, the military or any other readers program to worry. And because much of this debt extends rapidly, the highest rates rapidly reached.
At the end of the day, the biggest problem is not Powell's monetary policy. It is the addiction to federal government spending. Trump's call to replace Powell with someone who will reduce rates ignores real mathematics. The lowest short -term interest rates will work only if the most flexible monetary policy is perceived as a means to mask reckless budget deficits. That would make the highest inflation a certainty, not just a possibility. It may not arrive before the next elections, but it will inevitably come.
There is still time to avoid this cliff. Trump is right to worry about increasing debt costs, but he is pointing to a symptom. The solution is not to fire Powell, it is to cure the underlying disease, which is an excessive government expenditure.
Veronique de Rugy He is a senior research member at the Mercatus Center of the George Mason University. This article was produced in collaboration with the creators Syndicate.
