The Fed's Independence Under Siege: A Warning from Janet Yellen

In an escalation of pressure on the Federal Reserve, the Trump administration has taken steps that have raised serious concerns about the future of central bank independence. Janet Yellen, former Chair of the Federal Reserve and Secretary of the Treasury, commented on these developments in an article published by the Brookings Institution, warning of the dire consequences that could result from politicizing monetary policy.

Attempt to Dismiss Lisa Cook: A Dangerous Precedent

Yellen argues that President Trump's attempt to dismiss Lisa Cook, a member of the Federal Reserve Board of Governors, on the grounds of "for cause" is not only illegal but also represents a grave danger to the independence of the central bank. She sees this attempt as a direct politicization of the Fed, a threat to its leadership, and an attempt to subjugate monetary policy to the will of the President. Yellen emphasizes that this action could end the independence of the Federal Reserve, thereby undermining the credibility of US monetary policy both domestically and internationally.

Yellen explains that the law clearly stipulates that the term of office for members of the Federal Reserve Board of Governors is 14 years, and that this provision is specifically intended to prevent presidents from dismissing members simply because they disagree with them or seek to gain their loyalty. She adds that dismissing a member on the grounds of "for cause" must be based on documented misconduct, and that mere "allegations" do not constitute just cause.

A Threatening Message to the Federal Reserve

Yellen stresses that the essence of the matter does not concern a particular member of the Federal Reserve Board of Governors, but rather "intimidation." By targeting Cook, Trump sends a chilling message to all members of the Federal Reserve Board of Governors and presidents of the regional Federal Reserve Banks participating in the Federal Open Market Committee (FOMC): if you express opposition to the President's views, you will be next.

Yellen warns that such threats may make Fed leaders hesitant to perform their duties and unable to provide honest, professional, and independent opinions on monetary policy to the public. These threats could also change their voting behavior and turn the institution, known for its independence and achievements, into a mere tool to fulfill the President's wishes and political priorities.

Risks of Politicizing Monetary Policy

Yellen explains that one of the main goals of the Trump administration is to push the Federal Reserve to significantly lower interest rates in order to reduce the cost of servicing the US government debt of $37 trillion. However, she warns that this measure could have dire consequences.

Yellen cites historical examples to illustrate the inherent risks in politicizing monetary policy. She says that history has already provided painful lessons: when political leaders control central banks and force them to buy government debt or lower interest rates to reduce debt service costs, chaos will inevitably follow. She mentions examples from Germany in the 1920s, Hungary after World War II, and Argentina and Turkey in recent years, emphasizing that the results were similar in all cases.

She further elaborates that a politicized central bank leads to higher inflation, increased economic volatility, and currency depreciation. This path is not beneficial to the United States. The United States has taken similar detours: During World War II, the Federal Reserve was forced to maintain low interest rates to help the Treasury finance the war, which ultimately led to severe inflation.

Yellen concludes her article by emphasizing that the independence of the Federal Reserve is not merely a technical bureaucratic matter, but rather the cornerstone of US economic stability and global leadership. She believes that Trump's attempt to destroy this foundation to achieve his personal interests is a reckless and destructive act that completely contradicts the American spirit. She calls on Congress to defend the independence of the Federal Reserve, the courts to reject this illegal abuse of power, and the financial community to express its opposition to this direct attack on the credibility of the dollar.

Disclaimer: This analysis does not constitute investment advice. Investors should consult a qualified financial advisor before making any investment decisions.