Independence in check? How the Fed and 4 other central banks face political pressure

Brazil joins global central banks in defense of Fed president after Trump threat The independence of central banks — that is, the ability to set interest rates without political interference — is considered essential for a country’s economic well-being. This is one of the reasons why United States President Donald Trump’s attempt to fire Federal Reserve (Fed) Director Lisa Cook has attracted so much attention. 📱Download the g1 app to see news in real time and for free In countries where central banks align with politicians’ preferences, results tend to be worse, with higher inflation and slower economic growth, as decades of academic studies indicate. On the other hand, historical experience shows that independent central banks are more successful in maintaining price stability. There are several examples of central banks being subjected to political pressure. See below five notable cases. 🗒️Do you have any reporting suggestions? Send to g1 United States File photo: US President Donald Trump observes Jerome Powell, his nominee to chair the Federal Reserve (Fed), during a speech at the White House, in Washington, USA, on November 2, 2017. REUTERS/Carlos Barria/File photo Although no Fed official has been fired for not meeting an American president’s demands on interest rates, that does not mean that US leaders have not tried — and sometimes succeeded — to exert influence in other ways. 🔎 In Cook’s case, although her votes on interest rate decisions are in the background of Trump’s offensive, the initiative is based on unproven accusations of mortgage fraud. Former President Richard Nixon pressured then-Fed Chairman Arthur Burns to keep borrowing costs low despite rapidly rising prices to help him win reelection in 1972. The episode is widely seen as the starting point of an inflationary surge that was only contained by the politically unpopular actions of a successor at the Fed, Paul Volcker, who raised interest rates to double digits. The strategy sent the country into recession but controlled inflation for nearly four decades, largely by reestablishing the credibility of the U.S. central bank as an independent institution. Nixon, however, was not the first president to try to impose his will on the Fed. In 1965, Lyndon Johnson summoned the then president of the institution, William McChesney Martin Jr., to his ranch in Texas and demanded an end to the rise in interest rates — even pushing him and physically reprimanding him. Martin refused, fearing that Johnson’s fiscal stimulus would fuel inflation. Years later, however, he eased monetary policy in exchange for the president’s promise to raise taxes — an agreement that he later assessed had contributed to the acceleration of inflation. Turkey Turkish President Recep Tayyip Erdogan during a speech in Istanbul Murad Sezer/REUTERS Turkish President Tayyip Erdogan — who declares himself an “enemy of interest rates” — fired four central bank directors between 2019 and 2023 for raising borrowing costs or resisting the cuts he demanded and which, in his assessment, would reduce inflation. The effect was the opposite: inflation soared, the lira collapsed and families found it difficult to afford basic items such as rent and food. In 2023, Erdogan changed course and appointed American finance executive Hafize Gaye Erkan, who quickly raised the benchmark interest rate from 8.5% to 45%. His successor and current central bank president, Fatih Karahan, further tightened monetary policy before recently initiating easing. Inflation has fallen from its peak of 85% at the end of 2022, but remains in double digits. Argentina Casa Rosada, in Argentina Rafael Leal/g1 The nationalization of the central bank by former Argentine president Juan Perón, in 1946, placed the South American country on a path of recurring crises in the following decades. During this period, the government began printing money to finance expenses, which caused successive waves of high inflation and hyperinflation. Of the 14 BC presidents since 2000, several were removed due to disagreements with the government, including Martín Redrado, dismissed in 2010 for refusing to execute then-president Cristina Fernández de Kirchner’s plan to use billions of dollars in foreign exchange reserves to pay debts. Venezuela Nicolás Maduro speaks during a demonstration in Venezuela Stringer/AFP The country’s Constitution guarantees a certain degree of independence to the central bank and prohibits direct financing of government deficits. Even so, Venezuelan leader Nicolás Maduro — who will be tried in New York on drug trafficking charges, after being arrested by US special forces — approved laws that placed the institution under full executive control, with management appointed exclusively by the president. After the fall in global oil prices in 2014, the central bank began issuing currency to finance high deficits, fueling hyperinflation that peaked in 2018, estimated by some calculations at more than 1,000,000%. Zimbabwe Former Zimbabwean President Robert Mugabe in photo on October 3, 2017 AP Photo/Themba Hadebe The Central Bank of Zimbabwe also issued currency to finance spending by then-president Robert Mugabe’s government — including, according to the International Monetary Fund (IMF), election expenses, transfers to state-controlled entities and the purchase of subsidized equipment for farmers. Hyperinflation reached extreme levels and, in January 2009, led the then central bank president, Gideon Gono, to issue a 100 trillion dollar bill.

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