Trump ignores the lessons of Nixon and the US suffers as he targets Fed chair Jerome Powell
It was December 10, 1971, and Richard Nixon was on the phone in the Oval Office. As usual, a tape recorder placed on the presidential table began recording the speech.
Nixon was talking with Arthur Burns, then president of America’s central bank, the Federal Reserve. The topic of the conversation was the upcoming meeting of the Fed committee that sets key interest rates.
With the presidential election less than 12 months away, Nixon wanted to ensure that the president carried out the orders of Burns, whom he had appointed as Fed chairman a few years earlier. He called for interest rates to be lowered to allow the economy to gain momentum just in time for voters to reward Nixon at the ballot box.
Burns announced that interest rates are close to being reduced to 4.5 percent.
Nixon would tell Burns that there was only one way to deal with members of the Fed’s monetary policy committee who feared that lower interest rates could lead to higher inflation: “Kick their asses.”
Nixon is known today for corruption. The tidal wave of inflation unleashed by Burns and the Fed was forgotten as politically advantageous interest rate cuts were made to aid Nixon’s election victory in 1972.
Inflation will increase from 3.4 percent to 8.3 percent within 12 months. In September 1973, the Fed raised interest rates to 10.8 percent.
This was not enough; Inflation would not be forced out of the U.S. economy until another Fed chairman, Paul Volcker, raised official interest rates above 20 percent, plunging America into the recession of the early 1980s.
The extraordinary reaction of economists and central bankers this week unprecedented criminal investigation Donald Trump’s Justice Department’s remarks by current Fed chair Jerome Powell draw a direct line to Richard Nixon and his other phone calls with Burns in the early 1970s.
Powell, who has been labeled everything from “idiot” to “a big loser” by Trump, publicly announced Sunday night that a criminal investigation had been launched into evidence he presented to a Congressional committee regarding the overrun on the cost of rebuilding part of the Fed’s Washington offices.
Stating that no one is above the law, Trump said the investigation was just an excuse to pressure the Fed to lower interest rates to help Trump, who faces midterm elections in November.
“The threat of criminal charges is a result of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the president’s preferences,” he said.
“This is about whether the Fed can continue to set interest rates based on evidence and economic conditions, or whether monetary policy will instead be guided through political pressure or intimidation.”
Three former Fed chairmen who are still alive — Alan Greenspan, Ben Bernanke and Janet Yellen — joined Powell in support, likening Trump’s actions to developing countries being torn apart by weak central banks and high inflation.
“This has no place in the United States, whose greatest strength is the rule of law that is at the core of our economic success,” they declared.
A day later, 13 senior central bankers, including the Reserve Bank of Australia’s Michele Bullock, issued their own statements defending Powell and warning of the dangers of politicians interfering in setting interest rates.
“The independence of central banks is the cornerstone of price, financial and economic stability in the interest of the citizens we serve,” they said.
“It is therefore critical to preserve this independence with full respect for the rule of law and democratic accountability.”
These are not people who take words lightly, parsing printed words to within an inch of their meaning. But when they saw what was at stake, they decided to voice their support for Powell.
The governors of the world’s two oldest central banks, Erik Thedeen of Sveriges Riksbank and Andrew Bailey of the Bank of England, have signed up.
Christine Lagarde, who has chaired the European Central Bank since 2019, signed on alongside Anna Breman, who has been in charge of the Reserve Bank of New Zealand for less than two months (and has faced criticism from populist New Zealand Foreign Minister Winston Peters, who has fought the concept of independent central banking).
These bankers aren’t just worried about the reruns of Nixon and Burns. They fear actions such as launching a criminal investigation against a central banker for failing to cut interest rates could become normalized.
Luci Ellis, Westpac’s chief economist and formerly a senior executive at the Reserve Bank, said central bankers knew what would happen when their hard-won independence was given up.
Nixon and Burns caused inflation in the US economy for a decade. More recently, Argentina in the late 2000s and Türkiye, where inflation reached 80 percent last year, have suffered as populist leaders manipulate interest rates for political purposes.
Ellis said the biggest problem may be that Powell’s term ends in a few months.
“This turn of events poisons the well of Powell’s successor, whose appointment has not yet been announced. Who would accept a civil service position in the United States knowing that you could be subject to trumped-up criminal investigations?” he said.
Keeping up with Trump’s policy predictions is difficult at the best of times. But the move against Powell followed a series of proposals that normally dominate public debate.
These include a 10 percent cap on interest charged on credit cards, a plan for Fannie Mae and Freddie Mac, America’s two largest publicly owned housing finance agencies, to buy $200 billion ($350 billion) of mortgage bonds to lower lending rates, and a ban on large institutional investors from buying family homes.
Military action against Venezuela, initially described as an effort to stop the flow of illegal drugs and criminal immigrants into the United States, has now become explicitly a claim to that country’s oil resources, with an announced goal of dropping oil to $50 per barrel (although crude oil has risen by 10 percent since the military action).
Trump’s Greenland ambition is as much a political game as it is an economic one, as he seeks to harvest the Danish territory’s resources.
If we factor in ongoing tariffs (which could be struck down at any time by the Supreme Court) that would provide American voters with a $2,000 per capita “dividend” by the end of the year, that’s just the last 10 days of economic debate in the White House.
Trump, whose poll numbers are falling like temperatures in a Greenland winter, faces a problem that many political populists face: their rhetoric does not match the lived experiences of ordinary people.
Inflation has been above the Fed’s 2 percent target for almost four years. If not for big tech’s data center-building boom, the economy would have remained flat last year.
Last week’s figures from the Bureau of Labor Statistics, whose head Erika McEntarfer was fired last year, confirmed Trouble in the American job market.
By 2025, the United States has created a net 584,000 jobs. This compares with 2 million in 2023 and 2024.
Blue-collar jobs are disappearing on Trump’s watch. The manufacturing sector, which was assumed to be overburdened by Trump’s tariffs, lost almost 68,000 positions. Other losses were recorded in mining and logging (16,000), transportation and warehousing (59,000) and professional services (97,000).
The sector that boomed last year was health and social services, which accounted for almost 70 percent of all jobs created; this includes a 30 percent increase in hospital staff.
There was also a large increase in the number of people working part-time and having their working hours reduced.
The business community remained virtually silent as central bankers and economists quickly condemned Trump’s move on Powell.
Respected economic historian Adam Tooze has noted with alarm this seeming indifference among investors and business leaders who are now only interested in their immediate fortunes.
“[To them] Institutions don’t matter. What matters is the flow of money and power. “When it comes to POLITICAL economics, this is a moment of complete nihilism,” he wrote to Substack subscribers.
Monash University economist and former RBA economist Zac Gross said that of all the ideas coming out of Trump at the moment, it was hard to find ones that “have real heat” compared to ideas that are “mostly bark” (such as caps on credit card interest rates).
A repeat of what happened in Türkiye in the 1970s or last year will lead to high inflation and possibly recession.
“Even some Republican senators seem unwilling to risk that kind of economic disaster, and the Supreme Court has signaled that the independence of the Federal Reserve is an area where presidential power is not unlimited,” he said. “Still, this feels like pretty cold comfort given how great the potential economic damage could be.”
Nixon won 49 states in the 1972 election. But within two years he himself resigned in disgrace, while Arthur Burns was forced to manage an economic recession that he and the president had helped create.
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: excitement or email.
