Trump’s war on economic independence

US central bankers attending the Jackson Hole symposium later this week are getting used to facing fire from President Donald Trump. They are not alone. Most economic institutions that have delegated autonomy under US law to regulate or produce information have felt the heat this year. To see the emotional costs, watch this interview with Todd Harper, who was fired without cause from the board of the National Credit Union Administration in April. It comes courtesy of my colleagues in FT Specialist publication Banking Risk and Regulation. Read on for the economic costs.

What is the benefit of autonomy?

It is almost a truism. Fed chair Jay Powell and monetary policy officials repeat so often that independence from day-to-day politics enables better decisions that it is not really questioned. Autonomy “has been an institutional arrangement that has served the public well”, Powell said in the last Federal Open Market Committee press conference without any challenge.

My colleague Joel Suss produced a clear summary of the benefits of central bank independence on the FT’s Monetary Policy Radar last year, with lots of references and links. One of the most relevant academic contributions was written by Carola Binder of the University of Texas at Austin, who examined the effects of political pressure on central banks around the world. Sound familiar?

She divided political pressure into two categories. In the first central banks resisted, while succumbing in the second. Both were found to be associated with higher inflation, although the relationship was much stronger when central bank resistance faltered.

The raw data from 160 monetary policy institutions is difficult to argue with. Central banks with no political pressure had an average inflation rate of 5.5 per cent, those resisting pressure had an average inflation rate of 7.4 per cent and those succumbing to it faced a rate of 9.1 per cent.

I caught up with her last week. She said she “would still classify the Fed as resisting the pressure . . . [because it] did not cut rates at the president’s demand”. Over time, however, central banks that resist still tend to preside over rising inflation, albeit with a lag of six quarters. That should just about see Powell through to the end of his term.

Resistance to pressure depends on the degree of independence available to a central bank, a measure for which the US is now below average. This uses the definitions of Davide Romelli of Trinity College Dublin, who has categorised central bank independence using numerous metrics.

Romelli told me that his measurement is based on a country’s laws and is deliberately conservative. If he were producing an updated table today, the US figure would not change because the law has not changed, he said, but “the persistent public criticism of chair Powell . . . clearly raises concerns about the de facto independence of the Fed”. Click on the chart to see some of the different dimensions of independence.

Jawboning the Fed

Let us look at some of the de facto challenges to US central bank autonomy. Everyone has heard Trump call Powell a “stiff”, “numbskull” and “too late”. But the Fed has generally had respectful treatment from Scott Bessent, US Treasury secretary.

Bessent started in office saying neither he nor the US president wanted to influence the Fed’s decisions on short-term interest rates. Trump broke that rule immediately and Bessent appeared last week to have fallen into line. In an interview with Bloomberg, he said interest rates were too constrictive: “You know, if you look at any model . . . we should probably be 150, 175 basis points lower” (7 min, 23 secs).

Any model?

The godfather of all interest rate models is the Taylor rule, which links the short-term interest rate to the neutral real interest rate, the inflation target, the difference between inflation and the target, and the output gap. It is far from perfect and can be backwards looking, but it is not a bad approximation.

There are many possible data sources for these variables, and the Atlanta Fed helpfully produces estimates for all possible combinations. In the table below, I have replicated 30 different variations of the Taylor rule for current US economic conditions using the default variables from the Atlanta Fed. Only one suggests the interest rate is too high.

Later in the week, Bessent backtracked: “I didn’t tell the Fed what to do. What I said was that to get to a neutral rate on interest, that would be approximately a 150 basis point cut. I did not call for them to get there,” he said (17 mins 20 secs).

Unlike the first, Bessent’s second version was a fully defensible position.

A temporary irritant

There is nothing sinister about Trump nominating Stephen Miran to be a Fed governor. That is his right as per the US system. But Miran has interesting and changeable views on monetary policy, which are likely to make him an irritant on the board.

Sometimes he gives the standard view, such as this full-throated support of independence from October 2024.

An independent central bank delivers better monetary outcomes over time because it can make decisions focused on the economy rather than the short-term political calendar.

But his thinking is inconsistent. In a note he co-authored from March 2024 on reform of the Fed, he started by saying he wanted a structure that ensured it could operate with sufficient independence to set effective monetary policy free from political control, while also being accountable to democratic institutions. Few would disagree.

In the detail of the note, however, he did not seem to notice that one sentence was glaringly inconsistent with his earlier ambition.

Board members and Reserve Bank leaders should be subject to at-will removal by the president to ensure their accountability to the democratic process.

That would remove the one protection from Trump that members of the FOMC have. It is lucky that Miran appears just the temp for now.

Let’s turn it up to 11

Scott Bessent (again) gets full marks for his willingness to be humiliated. In the same interview in which he mixed up his models, he said he would be interviewing 11 candidates to become the next Fed chair. See Alphaville for the definitive low down of the 11.

But yet again, Trump went off script and shot down this pretence of a serious and objective selection process. Within hours, he told reporters he was “down to three or four names”.

The front runners at the moment are National Economic Council director Kevin Hassett, former Fed governor Kevin Warsh and current Fed governor Christopher Waller. Do not rule out someone outside these names, though. Trump has a long-standing habit of hiring Fox News contributors and hosts for positions. (None are part of the four or the 11 yet.)

EJ does it

When not appearing in the crowd at the January 6 2021 US Capitol attack, EJ Antoni, Trump’s pick for Bureau of Labor Statistics commissioner, spends a lot of his time writing partisan economic arguments.

His paper with Peter St Onge, Recession Since 2022: US Economic Income and Output Have Fallen Overall for Four Years, caught my eye, partly because it revolves around the definition of inflation. The title was a bold claim at odds with official data and opinion. The paper argued that if you use the pre-1983 BLS methodology for calculating CPI inflation, the US economy would have recorded much higher inflation in the 2021-2024 period. It goes on to deflate GDP with these much higher inflation figures, and finds “adjusted real GDP” falling when US interest rates rose in 2022. His chart is below.

Other economists, including former Harvard University president Lawrence Summers, have also used the pre-1983 BLS inflation methodology to make the argument that such data can help explain why economic sentiment was worse than economic data. They did not remotely argue the series was an appropriate GDP deflator.

When I wrote in June about dodgy official data, I said it was important to look for “corroborating evidence and broad trends” when taking decisions amid data uncertainty. We can do this for volume indicators to see whether Antoni’s adjusted real GDP looks plausible.

Menzie Chinn, of the University of Wisconsin-Madison, has been on the case. Back in November, he wrote a short paper critiquing Antoni’s work. He examined multiple series of data on volumes that do not rely on any inflation statistic — such as hours worked, payrolls and employment — which I have charted alongside Antoni’s adjusted GDP measure. In the chart below, I am comfortable saying there is no credible evidence the US economy has been in recession since 2022.

Antoni did not respond to requests for comment.

What I’ve been reading and watching

• China’s economy is in the doldrums again.

• A regular feature at Monetary Policy Radar records analysts’ views. Last week we spoke to those that still believe the Fed will not cut rates this year.

• I asked the question of what would happen if Trump hired a nutter to chair the Fed.

A chart that matters

Producer price indices are rarely exciting and are often complicated. The US figures for July broke one of those rules. It was notable because prices at the US factory gate for final consumers rose at the fastest monthly rate since 2022.

The figures were complicated by the strengthening of pricing being mostly in services, not goods — so it is not a simple tariff story. It might be an indicator of firming overall inflationary pressures, however.

Central Banks is edited by Harvey Nriapia