The independence of the Fed

Donald Trump, during his US presidential campaign, argued that the President should have a significant role in influencing the decisions of the Federal Reserve. “I believe the President should have a say, absolutely. I feel very strongly about that,” he stated. This should raise serious concerns among financial investors, as the independence of central banks is a cornerstone of developed economies. Why is this independence so crucial? Because allowing the largest debtors—the government—to dictate terms to their creditors—financial markets—on interest rates would undermine economic stability. From the debtor's perspective, low interest rates might seem like an easy solution to financial difficulties, but this would likely lead to high inflation, with severe economic repercussions. It's important to note that the interest expense on US public debt has surged to a record $1.11 trillion over the last 12 months, more than doubling in the past two years. This expense is on track to become the largest item in the US federal budget, even surpassing Social Security. Trump's desire to have a say in the Fed’s decisions seems driven by a wish to reduce this cost, but doing so risks igniting inflation and destabilizing the economy.