National Security And Interest Rates

The Federal Reserve faced significant challenges following World War II. Initially, it maintained low interest rates on U.S. debt as part of its wartime economic policy. However, by the end of 1950, in response to the Korean War and anticipated consumer rationing and price controls, consumer spending increased sharply, causing inflation to rise. Consequently, the Federal Reserve decided it was necessary to abandon its policy of low interest rates.

  • President Harry S. Truman, concerned about the implications for national security, particularly the threat from Soviet communism under Joseph Stalin, implored the Fed chairman to delay rate increases.
  • In his correspondence, President Truman emphasized the strategic importance of maintaining stable securities markets, suggesting that failing to do so would benefit Stalin.

Treasury-Fed Accord

Despite the President’s pleas, the Federal Reserve stood firm on its decision to adjust interest rates. This disagreement led to an unprecedented situation where the entire Federal Reserve rate-setting committee was called to meet with the President at the White House.

  • The outcome of this confrontation was the Treasury-Fed Accord, which granted the Federal Reserve greater autonomy in setting interest rates, marking the start of a new phase of operational independence for the central bank.
  • This autonomy, often referred to as "independence," has been maintained to the present day, although it has been tested several times throughout the last seventy years. Most recently, reports have indicated that allies of former President Donald Trump would seek to reduce this independence by enhancing presidential oversight of the Federal Reserve if Trump were reelected.

Trump's Potential Moves

The feasibility of such a change would depend largely on the composition of the Federal Reserve’s board and the reserve bank presidents, as well as Trump’s choice for the Federal Reserve Chair. The structure of the Federal Reserve includes seven governors appointed by the President to 14-year terms, subject to Senate confirmation. The law provides that these governors can only be removed for cause, such as malfeasance or dereliction of duty.

  • In 2018, President Trump appointed Jerome Powell as the Federal Reserve Chair. Although Trump later expressed dissatisfaction with Powell’s policies, President Biden reappointed Powell in 2022.
  • Powell has publicly stated his commitment to completing his term, emphasizing the legal protections that he believed shielded him from presidential dismissal.
  • Powell has also stressed the importance of the Federal Reserve’s independence as crucial for maintaining public confidence in its ability to manage inflation effectively. Even hypothetical attempts by Trump to influence the Federal Reserve directly could be constrained by adverse market reactions, which would likely discourage any substantial interference.

Throughout its history, the Federal Reserve has experienced various degrees of pressure from different administrations. For instance, during the Truman administration, negotiations related to the Treasury-Fed Accord resulted in the replacement of the Federal Reserve Chair with William McChesney Martin Jr., who later asserted the central bank’s independence in policy decisions.


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