The investigation concerns Powell’s testimony to Congress last year about the Fed’s renovation of its headquarters — a project that, like most others of its kind, has cost a lot more and is taking longer to complete than first estimated. From the outset, analysts saw the probe as a way to press the Fed to cut interest rates faster or make Powell step aside as chair so that the White House could appoint his successor ahead of schedule. The new prospect of criminal prosecution is unprecedented and vastly raises the stakes. Instead of folding, Powell is rightly digging in his heels.
The Justice Department has so far offered no comment. The president says he was unaware of the subpoenas and denied that any prosecution would be related to his disagreements with Powell over interest rates. That likely won’t be enough to reassure investors that the US still has an independent central bank.
The case for central bank independence really shouldn’t need restating. Once investors think that monetary policy is set according to short-term political calculations, they’ll expect lower interest rates and therefore, after a delay, higher inflation. That prospect in turn will raise longer-term rates (which the central bank can’t directly control), increase the cost of credit, discourage private investment and make public debt (which in the US is already rising unsustainably) harder to service.
An independent Fed shields the government of the day from pressure to do the wrong thing — which helps the economy and, except in the very short term, serves the government’s political interests as well.
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The White House is understandably preoccupied with “affordability,” and trying to show it will do anything and everything to get households’ costs under control. But a frontal assault on Fed independence serves to undermine that agenda.
When the administration interferes with monetary policy, it’s harder for the central bank to deliver what the White House wants: a lower cost of finance. This is a formula for financial panic and economic disaster. The president needs to change course. He should blame overzealous officials for this latest development, declare a ceasefire and say he has no intention of running monetary policy out of the White House.
The administration should then commit to letting Powell and his colleagues do their jobs. Persisting with this campaign of intimidation is a decision everyone involved will come to regret.
