If You Like 35 Percent Inflation, Go Ahead, Fire the Fed Chair

Opinion|If You Like 35 Percent Inflation, Go Ahead, Fire the Fed Chair

President Trump is ramping up his campaign for lower interest rates. It is a high-risk and potentially self-defeating effort.

For months, Mr. Trump has called for the Federal Reserve to ease monetary policy, to which he’s added calls for its chair, Jerome Powell, to resign. In recent days, the administration appears to have opened a dangerously novel front, even if it is potentially legal: building a case to fire a Fed chair for cause.

The risk of allowing the central bank to be perceived as a political tool is depressingly obvious, illustrated by even a cursory review of similar efforts overseas. Even if the American economy and financial markets are strong enough to moderate the impact of the Fed’s tarnished reputation, the directional response seems clear: higher long-term borrowing costs for households and businesses and a weaker currency that would support inflation.

Let’s look at Hungary and Turkey. Leaders of both countries, faced with budget deficits, inflation pressures and a desire to increase growth (sound familiar?) have broken institutional standards and changed laws to ensure that their central banks support the government’s political aims. That has usually led to lower interest rates aimed at speeding up the economy.

In Hungary’s case, the central bank was made independent in 1991, but the government over the past 15 years or so has repeatedly tried to influence monetary policy decisions. It has stacked the deck by increasing the number of monetary policy council voters. After a 2011 change to the Constitution that weakened the bank’s independence, all three major ratings agencies downgraded Hungary’s sovereign credit rating to junk, pushing borrowing costs higher and causing its currency, the forint, to fall.

Government efforts to control the bank continued anyway, most recently through legislation introduced this year by Prime Minister Viktor Orban’s Fidesz party, which would expand the council further, to 11 from nine, including another deputy governor to be selected by Mr. Orban.