Will President Trump Conquer the Fed?

Is President Donald Trump trying to get control of the United States Federal Reserve through blackmail? His Department of Justice has threatened to criminally indict Fed Chairman Jerome Powell on charges related to renovations at the Federal Reserve Board Building. Powell says this is a sham, arguing, “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”

Whether or not he’s right on this specific case, President Trump has made no secret of his desire to exert more control over the Fed. Investors around the world are watching the struggle carefully.

Who should control it? It’s a hard problem to solve.

• The First Bank of the United States was controversial from its inception to its expiration in 1811. President Andrew Jackson famously battled the Second Bank of the United States, following through on his “I will kill it” promise in 1832.
• The Federal Reserve was established in 1913 to perform similar functions yet avoid some of the problems of the banks.
• Up until the 1990s, elected officials had greater control over interest rates. But they could rarely resist the temptation to push down rates to try to win elections. Lower interest rates mean cheaper mortgages, cheaper business loans and more spending in the short term—but more debt and economic problems in the longer term.
• The next solution was to give power over interest rates to unelected experts. They’re not tempted to use them to “cheat” in elections. But under their watch, banks experimented with a massive quantitative easing program, creating money from nowhere to stabilize the economy during the 2008 financial crisis—and for years afterward. All that new money caused asset prices to soar. The rich, who own real estate, businesses and stocks, got richer. Those who rely on paychecks for most of their income stagnated.

Fixing this is one of the most important tasks of any politician. But how? President Trump’s push to lower interest rates will make mortgages cheaper—but at the expense of even more borrowing, even higher inflation, and a loss of any remaining confidence in the dollar.

The entire U.S. and global financial system is built on wrong foundations. It will never work perfectly, or even well. And the temptation of “cheats” and quick fixes will soon destroy the U.S.-dominated financial system, leading to extremely destructive times in the short term, but also paving the way for God’s perfect system just beyond.