Resisting Bullies Is Good for the Economy

On Sunday night, Federal Reserve Chairman Jerome Powell released a video statement notifying the public that the Department of Justice had threatened him with a criminal indictment surrounding his Senate testimony regarding renovation cost overruns at two Federal Reserve Buildings. Powell called the action “unprecedented,” and openly rebuked the Trump Administration for using the threat as a pretext to pressure the Federal Reserve into lowering interest rates.

Over the last two days, this drama has played out in the press, on Capitol Hill, and in the market, raising the central question of whether the Federal Reserve should remain independent from the executive branch, or if its leaders should take orders from the White House.

Powell called the Trump DoJ’s action “unprecedented.” Maybe. Criminal threats against Fed officials probably are indeed without precedent. But political pressure on the Fed, coming from the White House, is by no means without precedent.

In this piece, I discuss two prior episodes of conflict between the President and the Federal Reserve—1971 and 1950—and what they tell us about the Powell-Trump fight unfolding today.

The Capitulation Model: Nixon’s Re-Election, Stagflation, and the Arthur Burns Fed

The 1970s were a grim decade in U.S. history—the Vietnam War, Watergate, and from an economics perspective, stagflation.

Inflation began to accelerate in the 1960s as the expansion of the Vietnam War, combined with LBJ’s Great Society programs, led to persistent and growing government deficits. Nixon was elected in 1968 on a “law and order” platform amid racial tensions, as well as promises to end the war. Inflation was rising and gold outflows from the U.S. were accelerating.

Nixon appointed Arthur Burns as Fed Chairman in 1970 as the U.S. was in the middle of a recession and unemployment was climbing. Although Burns was a respected economist, Nixon probably picked him more because of his loyalty to the Republican Party than his other qualities.[1]

Evidence from the infamous Nixon tapes shows that Nixon pressured Burns heavily in the run-up to the 1972 election to lower interest rates, increase liquidity, and stimulate the economy, all to improve Nixon’s chances for re-election (Nixon was re-elected in 1972 in a landslide). Some of this appears to have been against Burns’ better judgment, and resistance from the rest of the FOMC. (Sound familiar?)

From a 2006 essay by Burton Abrams, titled “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes”:

With fewer than eleven months until the election and four days until the next meeting of the Federal Open Market Committee, Burns and Nixon have a private telephone conversation. Burns states that “I wanted you to know that we lowered the discount rate... got it down to 4.5 percent.” “Good, good, good,” replies Nixon. Burns indicates that the announcement of the discount rate reduction would be accompanied by the usual statement that it was done in order to bring the rate into line with market conditions, but with an added statement that it was done to “also further economic expansion.” Burns exclaims that he also lowered the rate to “put them [the Federal Open Market Committee] on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.” “Great. Great,” replies Nixon. ‘You can lead 'em. You can lead ‘em. You always have, now. Just kick ‘em in the rump a little.”

Nixon didn’t just coax Burns in person to cut rates. He also used more underhanded tactics:

In his memoir After the Fall, William Safire (1975, pp. 491-95), who was a speechwriter for Nixon during this time, recounts how the Nixon administration kept up a steady stream of anonymous leaks to pressure Burns, including floating one proposal to expand the size of the Federal Reserve (so that Nixon could appoint a majority of the new members) and another proposal to give the White House more control over the Fed, while planting a false story that Burns was requesting a large pay raise, when in fact Burns had suggested taking a pay cut. The taped conversations reported here illustrate further how political pressure is exerted at high levels.

The entire essay is worth a read, but I’ll summarize by saying that Abrams shows plenty of evidence that Burns thought monetary policy was too loose and there was too much liquidity in the banking system, and yet he engaged in aggressively expansionary monetary policy anyway to appease Nixon.

What was the net effect of easing policy in response to political pressure, in an environment where inflation was already climbing? The stagflation of the 1970s, which persisted even after Nixon resigned in 1973, leading to CPI inflation ultimately peaking in 1980 at over 14%.

Inflation was ultimately brought under control only after Paul Volcker was appointed to lead the Fed in 1979. Given the inflation picture, Volcker hiked rates to over 19%, triggering a painful recession and unemployment rates near 11%.

The Resistance Model: Harry Truman, the Korean War, and the Marriner Eccles Fed

The 1951 story paints a very different picture—a picture of what happens when a (former) Fed Chairman stands up to the President.

Marriner Eccles was Fed Chairman until 1948 and then remained on the Board of Governors after Truman removed him as Chairman. He emerged as Truman’s primary antagonist at the Fed leading up to the Treasury-Fed Accord of 1951, which established the independence of the Federal Reserve in monetary policymaking. (Ironically, one of the Federal Reserve buildings currently being renovated is named after Eccles.)

During World War II, the Fed had pegged the 10-year Treasury yield to 2.5% in order to support wartime deficits. After the war, there was some discussion among Treasury and Fed officials about relaxing various government controls around the bond market. But then the Korean War happened.

From Robert Hetzel and Ralph Leach’s “The Fiftieth Anniversary of the Treasury-Fed Accord”:

The formally correct but strained relationship between the Fed and the Treasury fell apart with the intensification of the war in Korea. On November 25 and 26, the Chinese army, 300,000 strong, crossed the Yalu River. Suddenly, the United States faced the possibility of a war with China and, if the Soviet Union came to the aid of its ally, World War III.

In anticipation of escalating military conflict in Korea and the financial costs thereof, Treasury officials sought to preserve the Fed’s anchoring of the long-end at 2.5%. Truman also feared that if the Fed didn’t support bond prices, the market would collapse. (This didn’t happen.)

Truman used his own forms of pressure to get the Fed to do what he wanted. Specifically, claiming in public that the Fed had agreed to do something that they hadn’t. From Hetzel and Leach:

After meeting with the President, the FOMC reconvened and asked Governor Evans to prepare a memorandum recording the events of the meeting. President Sproul reviewed it. The memorandum recorded that FOMC members had made no commitment to the President. However, the next morning the White House press secretary issued a statement that "The Federal Reserve Board has pledged its support to President Truman to maintain the stability of Government securities as long as the emergency lasts."

Eccles received telephone calls from Alfred Friendly of the Washington Post and Felix Belair, Jr., of the New York Times. Eccles contradicted the administration press releases by telling them that the FOMC had made no such commitment.

Disagreements about what really happened during that meeting between the FOMC and President Truman escalated over the following days, and culminated in this:

Belair of the Times telephoned Eccles (1951, p. 494) and informed him of the release of Truman's letter. Eccles then made a momentous decision. Acting on his own, he released a copy of the memorandum the FOMC had made recording its account of the meeting with President Truman. Eccles arranged for it to appear in the Sunday February 4 edition not only of the New York Times, but also of the Washington Post and the Washington Evening Star. The memorandum was headline news. As Eccles (1951, p. 496) put it, "[T]he fat was in the fire." Hyman (1976, p. 349) wrote, "By Monday morning the controversy had reached blast furnace heat."

“Blast furnace heat” might be a good descriptor for what is going on between Powell and Trump now. Regardless, the showdown between the President and the (former) Fed Chairman in 1951 didn’t only lead to the Treasury-Fed Accord, modern Fed independence as we know it and a resulting fall in inflation from 21% annualized in February 1951 to 1.5% in 1952. It also led to the creation of the modern, liquid Treasury bond market.

Prior to the Accord, the Fed was the primary actor in the government bond market. Eccles and his colleagues—Fed Chairmen McCabe and Martin (and there was even a Governor Powell [probably no relation] on the Board at the time)—believed that the Treasury market could function in private hands without constant intervention or support from the Federal Reserve. Truman’s fears turned out to be unfounded.

Powell Has Chosen Resistance, and Resistance Is Not Futile

We now have three cases of Presidents—Nixon, Truman, and Trump—pressuring the Fed to cut or maintain very low interest rates. Burns acquiesced, and we got the stagflation of the 1970s. Eccles resisted, and we got the modern Treasury market along with a period of largely stable inflation.

Powell has clearly chosen the Eccles playbook. The small coincidences are eerie—the building Powell is being investigated for is named after Eccles, Eccles had a colleague named Governor Powell, and 2026 marks the 75^th anniversary of the Treasury-Fed Accord of 1951.

But more significantly, the Eccles story tells us something about how the Powell situation might unfold. Both Chairmen had “blast furnace heat” levels of open, public conflict with the President. And Eccles, despite being removed from the Chairman position by Truman in 1948, kept his seat on the Board of Governors and continued to be a thorn in Truman’s side from there. Today, commentators are speculating that even when Powell’s term as Fed Chairman ends in May 2026, he might choose to retain his appointment to the Board of Governors, which lasts through 2028. Even after he is replaced, what problems might he cause for Trump, sitting at the same table but in a different seat?

Central Bank Independence Rests on People Willing to Fight for It

I believe that central banks should be allowed to conduct monetary policy in a manner that serves the long-term interests of the nation. Members of the Fed’s Board of Governors were given staggered 14-year terms deliberately, to insulate their decision-making from the short-term concerns that drive the two-year national political election cycle.

That said, central bank independence is by no means sacrosanct. The U.S. Constitution does not provide for a central bank. The Fed has no special Constitutional protection in the way the legislature, the executive, the judiciary, the States, and individual U.S. citizens do. It was created by Congress, through the powers of Article I, and can be destroyed by Congress, at any time.

The Constitution was signed in 1787. By contrast, central bank independence is a modern invention, stemming from the Accord of 1951. It only exists because people like Marriner Eccles and his colleagues believed it was worth fighting for. Jerome Powell took heed of Eccles’ example; so should we.

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[1] “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” https://fraser.stlouisfed.org/files/docs/meltzer/jep_2006_abrams_how_richard_nixon.pdf