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Siege on the Federal Reserve

Since the beginning of his second term, Donald Trump has been laying siege to the Federal Reserve. The immediate reason is his hostility towards its interest rate policy, with the Fed insisting on a 4% floor, explicitly attempting to counter the inflationary effects of the tariffs imposed by Trump. The president wants to bring rates down to 1%. His economic advisers argue that the economy needs more fuel; that the cost of money must be lower than that of the European Central Bank (ECB), currently at 2%; that a further depreciation of the dollar exchange rate is needed to promote exports; that the cost of mortgages needs to be lowered; and that the cost of servicing the US national debt, currently equal to defence spending, needs to be reduced.

These arguments foreshadow an ultra-expansionary monetary policy which, over the next decade, would add to the inflationary pressure of tariffs and a growing fiscal deficit. Trump is furious because every percentage point rise in interest rate costs the federal budget $360 billion. There is a well-founded suspicion that saving a few hundred billion dollars in interest would help mask the damage caused by his protectionism and tax cuts. The strategic stakes in this battle are high: they concern the very nature of the monetary power and its independence.

Burns, Knot, and Ricardo

Pressure on the central bank is constant and is exerted as much by other State powers and the international system of States, as it is by big financial groups. The Federal Reserve's records provide an example of the relentless pressure exerted by President Richard Nixon on Arthur Burns, head of the Fed from 1970 to 1978, as documented in the Oval Office recordings put in place by the president himself. Nixon feared losing the 1972 election. Burns gave in, lowered the discount rate and expanded the money supply. Nixon won the election, but monetarist historians blame Burns for the inflationary tide of the 1970s: a somewhat one-sided view, given the global scale of that wave, which was largely driven by the oil crisis.

The issue of central bank independence was a recurring theme after the global financial crisis and during the European debt crisis. In an October 2013 speech at the Bank of Mexico, the head of the Dutch Central Bank, Klaas Knot, fearing that unconventional measures would make central banks prisoners of government fiscal policies, appealed to the guru of classical bourgeois economics. In the early 19th century, David Ricardo explained why it wasn't a good idea to entrust governments with the power to issue paper money. For governments, he argued, would almost certainly abuse this power. And if circumstances in wartime demanded more money, central banks, Ricardo warned, should never, on any pretence, lend money to the government, nor be in the slightest degree under its control or influence. Ricardo was the voice of the stocklords, the lords of money, the commercial and manufacturing bourgeoisie who, in the Glorious Revolution, had imposed the creation of the Bank of England, while political government remained in the hands of the landlord aristocracy. In the age of imperialism, the independence of the central bank expresses a different combination of interests.

Independence of monetary power

The concept of monetary power is not limited to the monetary functions of the central bank, i.e., setting the cost of borrowing and the amount of money in circulation, or acting as lender of last resort, even though all this falls within its prerogatives.

In March 1979, an acute crisis shook the Bank of Italy. The Rome Public Prosecutor's Office indicted its top management for profiteering and aiding and abetting. The deputy director in charge of supervision, Mario Sarcinelli, was imprisoned. Governor Paolo Baffi was spared prison on grounds of age but had to resign. Both were acquitted two years later. The fog of scandal and rumour lasted for years.

For Marxist science, it was an opportunity to clarify matters. The central bank, wrote Arrigo Cervetto in April 1979, has only the power that can be conferred on it by big financial and economic groups, and they can only confer it to the extent that it reflects the balance of mutual relations and does not lean too much in favour of a single group. According to Marxist theory, it can be seen more as ‘monetary power’ than ‘financial power’. [...] In all countries, the pluralism of ‘economic powers’ determines a pluralism of ‘political powers’ and a ‘balance of powers’ between various institutions. When centralised in a national bank, ‘monetary power’ is not delegated, except partially, to the ‘executive power’ – generally the Treasury – but entrusted to the central bank, which is thus removed from the political circumstances of the executive.

The independence of the central bank is therefore based on its separation from the executive power and its political circumstances, and expresses the condition of balance between the big financial groups. The break in 1979 was a consequence of the war in the chemical industry, accentuated and exacerbated by global restructuring. It contaminated the legislative and executive branches, where the interests of the big chemical groups and the financial centres that support them clash, leading to paralysis and constant electoral appeals. The Bank of Italy (Bankitalia) had ended up leaning in favour of IMI, the financial group that funded the Rovelli-SIR chemical group. The attack on Bankitalia became, in this context, a corrective action aimed at rebalancing the big groups.

A few years later, the divorce between the Treasury and Bankitalia would strengthen its independence, freeing it from the constraint of covering the national debt, a precondition for the process towards monetary union.

On the one hand, the creation of the ECB expanded the plurality of financial groups to continent-sized dimensions, distancing federal monetary power from individual national political situations, there-by increasing its independence, as Mario Draghi later claimed. On the other hand, the proliferation of financial groups has complicated the balance of their reciprocal relations, which continue to be largely worked out through national central banks. The decade-long stalemate of the European banking union reflects this contradiction.

The Fed battle

The White House's attack on the Federal Reserve and its chairman has unprecedented characteristics: irreverent verbal attacks and public insults from Trump himself in the legacy media and on social media, especially on his own Truth Social. In response to the Fed's firm stance of maintaining its interest rates, Trump and Treasury Secretary Scott Bessent have called for Jerome Powell's resignation and presented a variety of potential replacements. Bessent has proposed appointing a shadow Fed chair with the task of foiling and delegitimising Powell, while leaving him in charge until his term expires in May 2026.

A debate has arisen over whether the president has the legal authority to dismiss the head of the central bank, and so far the prevailing opinion is that the Supreme Court would not endorse a dismissal unless Powell had committed criminal offences. This has led to accusations of fraud being brought against him for spending more money on the renovation of Fed buildings than had been budgeted with Congress. The accusation is so specious that Trump seems to have shelved it. Instead, he seems to be focusing on fragmenting consensus within the central bank.

At the last July meeting of the FOMC (the body that decides on interest rates), the two members appointed by Trump to the executive (Michelle Bowman and Christopher Waller) voted against the majority for the first time. Adriana Kugler, a supporter of Powell, resigned from the executive a few months before the end of her term. In early August, Trump fired the commissioner of the Bureau of Labor Statistics (BLS), who published a pessimistic report on employment. BLS data is important for the central bank's economic analysis. Now, Trump has signed the dismissal of Lisa Cook, another member of the executive, accused of falsifying documents to obtain favourable mortgage terms. The aim is to frighten and disrupt Powell's coalition, which is holding out for now, proving to be the most tenacious of Trump's internal and external opponents. Cervetto wrote in the article cited above: History has shown the ruling class that it is easier for a fraction of the bourgeoisie to conquer the Treasury than the central bank.

A proposal to reform the Fed

The White House's move to impose its will on the Fed over interest rates is accompanied by an attempt to radically limit its powers. One of Trump's first executive orders, on February 18th, declared his intention to recentralise, under his executive power [...] vested in the president, independent regulatory agencies that have so far operated with minimal presidential supervision. The order states that this will not apply to the Fed in its conduct of monetary policy, but it will apply to activities directly related to its supervision and regulation of financial institutions. It should be noted that the first major interference by the executive branch is happening precisely in monetary policy, and that supervision and regulation are essential functions for the exercise of monetary power, ensuring balance in the mutual relations between financial groups.

Stephen Miran, author of the Mar-a-Lago Agreement proposal [“Uncertainties About the Dollar and US Debt”, Internationalism, April 2025], head of Trump's Council of Economic Advisers (CEA), has been promoted again, appointed by the president to the board of the Fed, replacing the resigning Kugler. A document he wrote in March 2024 for the Manhattan Institute in New York is now circulating, proposing a reform of the Federal Reserve's governance. What makes the document interesting is that its co-author is Dan Katz, chief of staff to Treasury Secretary Bessent. Miran and Katz develop a scathing critique of the Fed's actions, accusing it of having ceased to exercise technocratic leadership in order to assume a position of political leadership.

The Fed's political independence is considered profoundly undemocratic. Recalibrating the Fed's governance is necessary with a new balance between increased presidential control over the board of governors and a strengthened system of regional Feds, which should be nationalised, entrusting their presidents with the choice of boards of directors, currently appointed by regional business communities. In the Miran-Katz proposal, the twelve regional Fed banks will be able to vote at every meeting and not on a rotating basis as is the case today, which will balance increased White House control over the Federal Reserve Board of Governors. This system is called monetary federalism and means reversing the power relations between the Fed and its regional agencies in voting on interest rates, from today's 7 to 5 in favour of the board to 12 to 7 in favour of the regional agencies. The terms of office of the board governors and regional agency heads would all be shortened to eight years and, crucially, all should be subject to at-will removal by the president to ensure their accountability to the democratic process.

The proposal is an open challenge to the independence of the Fed as the central bank and to the credibility and financial stability of the United States. It would nullify the two essential characteristics of monetary power: its separation from the executive power and its centralisation. The attempt reflects some profound changes taking place in the financial system: the rise of powerful non-banking groups and unlisted private equity behemoths among the giants of finance; the proliferation of cocky investment clubs that combine high technology and the private issuing of digital currency; the unbridled growth in the issuance of public and private securities that herald disruptive debt restructuring and monetisation.

Lotta Comunista, July-August 2025

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