Donald Trump is not the first American president to try to break the Federal Reserve Bank’s independence. And, so far at least, this is not the most dramatic attempt.

That accolade goes to President Lyndon Johnson on December 5, 1965.

He was so furious with central bank chair William McChesney Martin Jr for raising interest rates, that he called him to an urgent meeting at his ranch, where he was recovering from gall bladder surgery.

That didn’t stop him holding Martin up against a wall, and shouting: ‘You’ve got me in a position where you can run a rapier into me and you’ve done it. You took advantage of me and I just want you to know that’s a despicable thing to do.’

Trump hasn’t quite reached the stage of pinning Jay Powell, the present chairman, to the wall but he has held his feet to the fire for keeping rates too high: the President wants them lowered from the current 4.25 per cent-4.5 per cent rate to as low as 1.5 per cent.

Yet Martin, like Powell, held firm against Johnson, who said higher interest rates would slow the economy, hurting his domestic agenda. 

Rate war: Donald Trump wants the US Federal Reserve, led by chairman Jay Powell, to lower interest rates from the current 4.25% to 4.5% rate to as low as 1.5%

Like Powell, Martin and a majority of members who help set rates were more concerned by rising prices.

What’s more, Martin told Johnson in no uncertain terms that the decision of the Fed – under the Federal Reserve Act of 1913 for rate-setting – was final. 

Not only was Martin tough but he is acknowledged as one of the world’s most influential central bankers.

He was also the longest-serving Fed chair in history, spanning nearly two decades and seeing through five administrations.

The Fed’s role, he said, was to be the chaperone who ‘has ordered the punch bowl removed just when the party was really warming up’. And so it has proved to be, more or less, until now.

Trump wants more than Johnson. He wants to change the board of the Fed, and the rate-setters, starting with his latest attempt to fire one member, Governor Lisa Cook, following a criminal investigation launched by the justice department into the nature of the mortgages on two properties she owns.

The President claims the investigation into Cook – appointed by Joe Biden in 2022 – is sufficient ‘cause’ for dismissal. 

The terms of the Federal Reserve Act give it privileged status to prevent presidents from removing members over policy disagreements.

But a get-out clause allows firing for ‘cause’ – Trump says Cook acted incompetently at best in financial affairs.

Not even legal experts quite know how ‘cause’ is defined although it’s thought to mean malfeasance or incompetence.

Some argue it does not include matters relating to retrospective personal transactions, and is likely to end up in the tangles of the Supreme Court.

Cook and the Fed are refusing to budge. Cook says she will issue a statement clarifying the purchase of the properties while her attorneys say she will sue the administration over Trump’s attempts to fire her.

This is a battle for the soul of the Fed. It’s one that Trump is unlikely to win without national uproar, and his advisers should go back to the Johnson-Martin spat to see why they can’t win this one.

The Fed doesn’t give in. Martin was right: by 1969, inflation was at an 18-year high of 5.75 per cent (though Martin later said he failed to take the punch bowl away fast enough).

What’s interesting is that US markets appear to be taking Trump’s threats with a pinch of salt. Investors are confident Powell will cut rates next month. 

Bond traders are more nervous, pushing up the yield on Treasury 30-year bonds, making it more expensive for the US to borrow.

That is having a knock-on effect on bond prices around the world, particularly in the UK and France where investors are worried by debt-laden government finance.

Tricky times!

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