Former Federal Reserve Chair Janet Yellen delivered a stark warning yesterday about former President Donald Trump’s proposed plans to exert greater control over the central bank if re-elected. In an exclusive interview with MSNBC, Yellen characterized Trump’s intentions as “very dangerous” and potentially damaging to America’s economic stability.
“Politics can’t enter this,” Yellen emphasized, her voice carrying the weight of someone who’s navigated monetary policy through turbulent economic waters. “The independence of the Federal Reserve has been absolutely critical to our economic success.”
The former Fed chair, who now serves as Treasury Secretary under President Biden, responded directly to Trump’s recent statements suggesting he would replace current Federal Reserve Chair Jerome Powell and assert more direct influence over interest rate decisions. Trump’s campaign has repeatedly criticized Powell for maintaining higher interest rates, which the former president claims are hurting economic growth.
Yellen’s concerns stem from decades of economic consensus that central bank independence serves as a cornerstone of financial stability. Research from the Bank for International Settlements shows that countries with independent central banks typically experience lower inflation rates and more sustainable economic growth than those where political leaders control monetary policy.
“When you look at countries where political leaders dictate interest rates, you consistently see worse economic outcomes,” Yellen noted. “We’ve built a system in the United States where monetary policy decisions are made based on economic data, not political calendars.”
The Federal Reserve operates under a dual mandate from Congress to maintain price stability and maximum employment. Its independence allows policymakers to make potentially unpopular short-term decisions that benefit long-term economic health. Last year, the Fed raised interest rates to combat inflation that peaked at 9.1% in June 2022, the highest level in four decades.
Trump’s criticism of Powell isn’t new. During his presidency, he repeatedly attacked the Fed chair, whom he appointed in 2018, for not cutting interest rates more aggressively. In one particularly direct 2019 tweet, Trump asked, “Who is our bigger enemy, Jay Powell or Chairman Xi?”
Economic experts across the political spectrum have expressed concerns similar to Yellen’s. Former Republican Treasury Secretary Henry Paulson recently told the Financial Times that preserving Fed independence “is essential to our economic strength.”
Mark Zandi, chief economist at Moody’s Analytics, explained the potential consequences of political interference with the Fed in starker terms. “When central banks lose independence, we typically see boom-bust cycles that ultimately hurt the very people politicians claim they’re trying to help,” Zandi said in a recent analysis.
The controversy unfolds against a backdrop of gradual economic improvement. Inflation has cooled to 3.4% as of April 2024, according to the Bureau of Labor Statistics, down from its 2022 peak but still above the Fed’s 2% target. Meanwhile, unemployment remains at a historically low 3.9%.
I’ve covered economic policy in Washington for nearly two decades, and I’ve rarely seen such uniform concern from economists about a presidential candidate’s monetary policy proposals. The consensus view holds that political pressure on interest rate decisions typically leads to artificially low rates before elections, followed by painful corrections afterward.
Markets have historically reacted negatively to threats against Fed independence. A 2019 study by the Federal Reserve Bank of San Francisco found that even perceived threats to central bank autonomy can increase market volatility and risk premiums on government debt.
Yellen’s warning reflects the serious nature of these concerns. “We’ve built institutions in this country that have served us extremely well,” she concluded in her MSNBC interview. “Undermining them would be a grave mistake with long-lasting consequences.”
The Biden campaign has seized on Yellen’s comments, framing the election as a choice between economic stability and unpredictable policies. The Trump campaign, meanwhile, maintains that lower interest rates would boost economic growth and help working Americans struggling with higher borrowing costs.
As November approaches, voters face competing economic visions that extend beyond traditional policy differences to questions about the fundamental structure of America’s economic institutions. The debate over Federal Reserve independence represents just one aspect of this broader economic narrative.
