A political leader demanding questionable policy from the central bank and testing the legal limits to get it - to Martin Redrado, sitting in Argentina, Donald Trump's stand-off with the Federal Reserve feels surprisingly familiar.
Redrado was fired as head of Argentina's central bank in 2010 after he resisted orders by then-President Cristina Kirchner to hand over reserves to help pay off national debts. He fought the decision successfully in court but eventually resigned in the face of what he told the BBC was intolerable pressure. Today, the clash is remembered as one of the early warnings of the economic turmoil that later engulfed Argentina, exposing it to high inflation and a currency plunge from which the country is still recovering.
Trump's fight with the Fed has sparked debate about whether the U.S. might be heading in a similar direction.
Since his return to office last year, Trump has accused the chair of the U.S. central bank, Jerome Powell, of mishandling the economy and driving up debt costs for the government by keeping interest rates too high. But his interventions at the bank have not been limited to social media complaints.
In August, Trump moved to sack a top policymaker, Lisa Cook, a decision now being challenged at the Supreme Court. Then, on Sunday, Powell stated that the Fed was facing a criminal probe from the Department of Justice regarding cost overruns at a property renovation—concerns that Powell has dismissed as pretext.
Market reaction to the drama has remained muted, which analysts said was a sign that investors expect the bank to be able to continue operating freely. But that faith will be tested in the coming weeks when the Supreme Court is due to hear arguments about Cook's firing, and the president is expected to announce his pick to replace Powell, whose term as Fed chair ends in May.
Redrado said he has been surprised to see echoes of his own battle happening in the U.S., long held up as a global model. This seems more like an emerging market story, he said.
This sentiment was echoed by economist Jason Furman, who led former President Barack Obama's Council of Economic Advisers, as he referred to Trump's intervention as behavior typical of a banana republic—a derogatory term denoting countries with unstable political and economic conditions.
Former Fed chair Janet Yellen raised similar concerns, warning against the implications of Trump's desired Fed policy: It is the road to a banana republic, she said.
Trump has remained defiant in the face of calls to limit his interference with the bank, stating, I think it's fine what I'm doing. However, economists caution that his attacks could pose risks to the economy, emphasizing that central banks operate most effectively without political pressure.
A study analyzing central banks in 118 countries found that about 10% faced such pressures annually, often leading to higher inflation in countries led by nationalist or populist figures, exemplified by Turkey under President Recep Tayyip Erdogan.
As the U.S. navigates this turbulent terrain, analysts assert that central bank independence, typically linked to more favorable economic outcomes, is crucial for mitigating inflationary pressures. Although the Fed may remain insulated from traditional political interference, the current situation raises critical questions about the future of its independence and the broader economic landscape of the United States.
