Trump’s Criticism of Fed’s Rate Decisions Not Necessarily a Threat to Its Independence, BIS Says
Trump has repeatedly urged Powell to lower the Fed’s key interest rate in order to lift growth
Public calls for lower interest rates of the kind directed by President Trump toward Federal Reserve Chair Jerome Powell are not a threat to the central bank’s independence, the Bank for International Settlements said Sunday.
The Switzerland-based BIS is owned by most of the world’s leading central banks, although not the Fed, and has long provided a forum to policymakers for sharing ideas and concerns.
Over recent decades, the BIS has advocated for giving central banks freedom to set interest rates to meet the goals mandated by legislatures, which usually include keeping the inflation rate at a specified level or within a range.
On a number of occasions, Trump has urged Powell to lower the Fed’s key interest rate in order to lift growth. Earlier this month, he called on Powell to reduce the rate to between 1% and 2% from 4.3% in order to contain the rising costs of servicing the government’s debts.
While the BIS said in an annual report that doubts have been raised about the administration’s commitment to central bank independence, it judged that comments of the kind made by Trump don’t represent a threat to the Fed’s autonomy.
“As long as society supports an institution with a mandate to preserve stability, it should not be a threat,” said Agustin Carstens, general manager of the BIS and a former governor of Mexico’s central bank.
Despite Trump’s criticisms of the Fed’s policy decisions, opinion polls suggest a majority of voters continue to back its independence in setting interest rates. A mid-April survey of 4,941 U.S. adults by YouGov found that 57% supported the Fed’s independence, while just 14% wanted to see it removed. However, 29% were undecided.
Carstens said disagreements between governments and central banks are “almost by design,” since the power to set interest rates is delegated to a central bank precisely because it will be willing to take decisions that a government would not.
“It shouldn’t necessarily surprise us that there will be from time to time tensions because what society has said is this institution should do what it deems necessary to protect the value of the currency, and oftentimes what needs to be done doesn’t match with what governments may want to see,” he said.
The BIS repeated its view that the independence of central banks is essential if they are to succeed in protecting the value of money, and warned that failure to perform that task can have serious consequences.
“We have had quite substantial episodes where monetary policy mismanagement has led to devastating effects on inflation, affecting the well being of individuals and firms, oftentimes bringing countries to a brink,” Carstens said.
In its annual report on the global economic outlook, the BIS said the prospects for growth have been weakened by the unpredictability that the Trump administration has brought to policy making, in addition to the new barriers to trade that tariffs represent.
“Beyond the policy measures themselves, the repeated cycle of announcements, adjustments and reversals has fostered an atmosphere of uncertainty and volatility, compounding the challenges for the global economy,” the BIS said.
The BIS said the fragmentation of the global economy wrought by higher tariffs would likely increase the frequency of inflation surges such as those that occurred in the wake of the Covid-19 pandemic.
“As supply chains adjust, there is the potential for significant disruptions to trade and temporary shortages of some goods,” the BIS said. “As witnessed during the pandemic, such disruptions can have significant and long-lasting ramifications for production and prices across the economy.”