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Editor’s Note: United States President Donald Trump on Thursday (April 17) repeatedly attacked Jerome H Powell, chairman of the Federal Reserve, who had cautioned the previous day that the President’s tariffs could pose a challenge for the American central bank’s goals of controlling inflation and keeping the labour market healthy.
Trump posted on social media that “Powell’s termination cannot come fast enough!”, accused him of “playing politics”, and declared that “If I want him out, he’ll be out of there real fast, believe me.”
More than five years ago, on March 14, 2020, Trump, who was then in his first term in the White House, had said at a news conference that he was “not happy with the Fed because it was “following” and “we should be leading”.
He had the same complaint on Thursday too, berating the Fed chair as ““Too Late” Jerome Powell of the Fed, who is always TOO LATE AND WRONG”.
Five years ago too, Trump had said he had the right to remove Powell “and put him in a regular position and put somebody else in charge [of the Fed]”.
The 2020 press conference had come as the Covid-19 pandemic bore down on the world. But Trump had privately spoken about firing Powell even earlier, in December 2018.
According to reporting by The New York Times, Trump had told aides that Powell, who had raised rates, would “turn [him] into Hoover”, a reference to Herbert Hoover, who was President from 1929 to 1933 in the midst of the Great Depression.
Powell was nominated to the Federal Reserve Board of Governors by President Barack Obama in 2012, and he was elevated to Chairman by President Trump in 2018.
He has been in the post since February 5, 2018. President Joe Biden nominated him for a second four-year term in 2022, and he was sworn into the position on May 23, 2022, following confirmation by the US Senate.
Friction between the White House and the Fed Chair is not unheard of in the US – or, for that matter, in India. But differences have mostly not been allowed to escalate into crises.
This is the story of the relationship between the Executive and the central bank, in the US and India, the world’s oldest and largest democracies. It was first published in The Indian Express in 2018, when Urjit Patel was RBI Governor and Arun Jaitley was Finance Minister.
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In 1980, with a raging inflation and an unemployment rate of over 7% in the US, advisers of President-elect Ronald Reagan warned that the Federal Reserve’s independence “should not mean a lack of accountability”, demanded clearer monetary targets from the central bank, and encouraged efforts by the US Congress to monitor the Fed’s performance.
Several economists including the Nobel Prize winner Milton Friedman (1912-2006) assailed Paul Volcker, the Chairman of the Federal Reserve. Arthur F Burns, who had been the Fed Chair from 1970-78, told Volcker that “Milton wants to abolish the Fed (and) replace you with a computer”, Sebastian Mallaby recorded in his magisterial biography of Volcker’s successor Alan Greenspan, The Man Who Knew: The Life and Times of Alan Greenspan (2016).
After Reagan moved into the White House in January 1981, his staff let it be known that the President would visit the Federal Reserve headquarters at Eccles Building in Washington DC.
“Bristling at the thought — the symbolism of the Commander-in-Chief marching into his office had to be avoided — he [Volcker] changed the meeting to the Treasury,” Mallaby wrote.
When they met, Reagan asked Volcker: “I’ve had several letters from people who raise the question of why we need the Federal Reserve. What do you suggest I say to them?”
Volcker replied: “Mr President, there have been concerns along those lines, but I think you can make a strong case that we have operated quite well. Unfortunately, we are the only game in town right now fighting inflation. Once the budget gets under control, we will have a better shot at taking the pressure off prices.”
Volcker’s answer did the trick — it switched the focus to budget policy.
“The more he could avoid monetary issues, the more he would preserve his independence,” Mallaby wrote. Volcker, who served until 1987, and raised the federal funds rate to a peak of 20% in June 1981 as the US fought to control the rise in prices.
Volcker finally won his battle against inflation, which fell from its peak of 14.8% in March 1980 to below 3% by 1983.
RBI Deputy Governor Viral Acharya may have alluded to this approach to decision-making in his October 26 [2018] speech that riled the government.
A government’s horizon of decision-making is rendered short, like a T20 cricket match, by considerations such as national and state elections, and populist alternatives acquire urgency, Acharya said.
A central bank, by contrast, plays a Test match, trying to win each session of a day’s play but importantly, also to survive so as to have a chance to win the next session, he said.
In that speech came the first indication of an escalation that has seen the sovereign take the first step towards issuing a directive to RBI by initiating consultations with the Governor — invoking a provision in the RBI Act that had not been used even during wars or major financial crises.
[Section 7(1) of The Reserve Bank of India Act, 1934, says “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.” This provision, never used until then, was seen as impinging upon the RBI’s autonomy and undermining the authority of the Governor.]
Early instances of friction
To be sure, conflicts between the government and RBI are not new.
The longest-serving RBI Governor after Independence, Benegal Rama Rau (1949-57), was forced to quit after a confrontation with then Finance Minister T T Krishnamachari, popularly known as TTK.
Then Prime Minister Jawaharlal Nehru backed his cabinet colleague, and wrote to Rau: “Obviously [the Bank] also has a high status and responsibility. It has to advise the government, but it also has to keep in line with the government.”
However, in April 1964, the same TTK told Lok Sabha: “I am very happy that successive Governors of the Reserve Bank have been able to shoulder this increasing responsibility that is being cast on them, are… able to take an independent view and [do] not completely subordinate their views to those of the party in power, including the Minister. I have been very grateful during my two spells as Finance Minister for the independence shown by the Reserve Bank and I want it to have that independence.” (History of the Reserve Bank of India)
The tenures of two other RBI Governors were impacted by political changes.
* K R Puri, who was appointed by Indira Gandhi’s government a couple of months into the Emergency had to leave in May 1977 after the Janata Party came to power.
* And R N Malhotra, who became Governor in 1985, got an extension after his term ended; however, he had to leave in 1990 after Chandra Shekhar became PM.
The Chandra Shekhar government, in which Yashwant Sinha was Finance Minister, moved Finance Secretary Bimal Jalan to the Prime Minister’s Economic Advisory Council. Ironically, in 1998, when Atal Bihari Vajpayee’s NDA government assumed office, Sinha “inherited” Jalan as RBI Governor — appointed by the United Front government in the previous year.
“We built the best of relationships, with our roles clearly defined, and by building a rapport with the backing of Prime Minister Vajpayee, who kept the [RSS affiliate] Swadeshi Jagran Manch at bay,” Sinha told The Indian Express in 2018.
Give-and-take: ways to manage tensions
Differences between the government and RBI were probably handled with greater subtlety in the past. Several earlier Governors refrained from boiling over in public, and tempered their language while signalling disagreements with fiscal policymakers.
“You can differ strongly when pushed to the extreme. But you have to choose your words carefully,” a former Governor told The Indian Express during the tensions of October-November 2018.
Manmohan Singh, who was RBI Governor between 1982 and 1985 provided an insight into negotiations with the government in a conversation that his daughter Daman Singh reproduced in her book, Strictly Personal: Manmohan and Gursharan (2014).
“There is always give-and-take. I had to take the government into confidence. The Governor of RBI is not superior to the Finance Minister in authority. And if the Finance Minister insists, I don’t see that the Governor can really refuse unless he is willing to give up his job,” Manmohan Singh said.
Indeed, that is what some Governors may have chosen to do. Over a decade [before 2018], a Governor of the RBI was called by a Parliamentary panel whose chief asked him who appointed the head of the central bank.
“The Cabinet and the Prime Minister,” the Governor said. The MP then wanted to know who sacked the Governor. “Sir, they don’t wait [for that]. They go,” the Governor replied.
That Parliamentary Committee chief was gracious enough to apologise. But as Manmohan Singh, when asked if he would have liked to stay on in the RBI, told his daughter: “Well, I would have liked to, but then when you are told to leave, I guess you leave.”
This article was first published on November 1, 2018, with the headline RBI & government: A delicate balance. The current version has been updated and edited slightly for clarity.
