The Federal Reserve is undoubtedly one of the most influential financial institutions of this time—the central bank for the country with the largest economy in the world: the United States. The direction and pursuit of the policies made by the Federal Reserve impact the lives of 350 million Americans, and likely those of 8 billion people living in other parts of the world. That is why central banks, especially those like the Fed, are designed to project a linear policy and enforce a stable regulatory environment over shifting political landscapes. Now, this function is being threatened under the Trump administration.
Donald Trump did not conceal his displeasure with the Fed, especially towards Jerome Powell, since the beginning of his first term in office. Trump's feelings have not changed, and he is now back in the white house. Trump and his administration have consistently demanded that Powell and the board lower the interest rate to support his vision of boosting the US economy. This demand was not realised as Trump had hoped, and led to some serious consideration of 'removing' Powell from the board.
Removal of a Chairman of the Federal Reserve can be by the President "for cause". Where the "for cause" refers to inefficiency, neglect of duty, or malfeasance in office, but political purpose was never a part of an orthodox interpretation of "for cause". Suppose Trump's intention to change the chairman of the Fed, based on disagreement of monetary policy between the agency and the government, sets a new precedent for an alternative way to interpret "for cause". In that case, we may see the end of an independent Federal Reserve.
What is the possible implication of the US without an independent central bank? The immediate and most predictable outcome will be a considerable rate of volatility in the US market. As the Federal Reserve will no longer be able to effectively carry out its goals of maximising employment and stabilising the inflation rate, its decisions will be influenced mainly by political pressure. We may expect a start of a long-term inflation with such a change.
In the long term, the US dollar's status as a global reserve currency may be weakened. As the credibility of the US central bank and economic stability is significantly damaged, it is a probable result. This essentially limits the US options economically, diplomatically, and strategically. The US dollar holds a crucial position in energy trade, particularly for oil purchases, and the US government and its people have benefited from the fact that the US dollar is the primary currency used in most energy trade. If securing energy becomes a more challenging task, the economic volatility will increase.
The US dollar has been a crucial diplomatic and strategic instrument for the US government. Up until recently, it was not difficult to see the allies of the US wanting a currency swap with the US in order to stabilise the impact of foreign currency drain and uncertainty for their domestic financial market. Moreover, the US dollar serves as a tool for projecting economic sanctions by foreign states and controlling the international monetary system, which enables the US to deploy its strength in actions anywhere in the globe without escalating the situation to a higher degree. Losing these options will threaten the US government's status in the international community.
This is even more so as China and Russia are preparing to overtake the US's nearly monopolistic position in the global reserve currency and international financial system. Over the last 20 years, China and Russia have been working to facilitate regional and international cooperation to gain control of the global monetary order. The BRICS has been a central tool in this regard. After the economic sanctions against Russia became apparent, cases of oil trade among them have shown that their version of a financial ecosystem can function to a certain extent. This suggests that alternatives to the US dollar and the US-led financial system exist.
There are many implications for the ROK and Japan to note in this change being pushed in the US. Currency inflation may occur in unpredictable times and at varying rates, as political pressure and influence are exerted in the US. This extends to further impact on trade agreements and economic consequences. The administrations must gain the capability to flexibly and responsively adjust and stabilise their monetary policies. However, this does not mean that the ROK and Japan should also grant the administration greater authority to oversee the functions currently managed by their central banks. As we have seen the impact of populism and a series of central bank systems being amended in the 2020s, this only increases international markets' volatility and will come back as substantial economic difficulties in the lives of its people. It is a time for us to revisit the intended purpose of our system and ensure we have a clear and concise understanding of it before we innovate, change, and progress.
Kanghyun Seo is the Politics Editor at the Asia-Pacific Democracy Incubator and a student passionate about understanding the intersection of politics, economics, and international relations.