The Trump-Powell case holds the bench in the financial chronicles of this summer: the President of the United States does not miss an opportunity to express his contempt for the President of the Federal Reserve (the US Central Bank), Jerome Powell. And he would like to hunt him because he does not cut interest rates. But he cannot: his mandate expires in 2026. The question may seem technique or affect a few professionals. But in reality it affects all modern democracies, including European ones.
Central banks are like humans: sometimes they are wrong. But what matters most in acting a central bank is not its infallibility, but its authority. And to be authoritative you must be able to be independent. From the central bank derives the monetary policy of a nation or, in the case of the EU, of the 20 countries that have joined the monetary union of the Eurozone. In a nutshell, the central bank controls the coin: she decides how much there must be around. And, through interest rates, it determines its main dynamics. It is therefore important that it is independent, so as to subtract the control of the money from the executive power. A government that can decide every day how many banknotes to print would have no international credibility. For this reason, from the post -war period, the central banks have gradually divorced politics. But it was the same policy that determined this choice, in the belief that it was the best thing in the interest of the nation and for its financial reputation.
Having said all this, the Trump-Powell case only confirm the goodness of the separation between the central bank and the government. And it’s not just a political matter: the proof that Powell’s dismissal would be a boomerang for the whole of America and for Trump himself comes from the markets. Whenever the President uses it insults him or claims that he will get him the time soon, the reaction of American and dollar titles is opposed to what Trump has in mind. Follow the reasoning: Powell is accused by the White House of not cutting interest rates. If he did, the returns of the government bonds and the government would save on interest. But when Trump “Licenza” Powell, the returns instead of going down (as they should do in view of a new president of the Fed who does what Trump tells him), go up. It happened every time Trump spoke about Powell. And, at the same time, the Wall Street bag, instead of toasting the cutting of the rates, loses ground. The reason for such a reaction is the fear that the Fed will lose its independence. And with this, the US become less credible. It matters little that Powell is good or not; that does well to keep the rates high or not. What matters is that with an autonomous Fed, the monetary policy does not make the government, with the risk of supporting its political designs also at the expense of the interest of the entire nation. And an autonomous Fed also becomes an easy and free scapegoat for the same US president. It is also convenient for him, after all.
This is a bit about what happens here in Europe: how many times the ECB has been accused by the policy of practicing restrictive monetary policies. For example in the fight against inflation. But also for the European Union the same rule applies: better a ECB that is wrong rather than a central bank that obeys governments.
Of course, the risk is that even a central bank starts to do politics, to encourage this or that deployment in this or
that nation (in the case of the EU). But it is an invitable risk on which, at least in the European case, it supervises the entire executive committee. A better system, to defend the wealth of a nation, has not yet been invented.