There is no direct precedent for the U.S. Justice Department’s threat to bring criminal charges against Federal Reserve Chairman Jerome Powell or for Powell’s public condemnation of the move. But as Mark Twain allegedly observed, while history does not repeat itself, it often rhymes. In fact, two episodes provide insight into the current pat situation and the future of Fed independence.
The first began 75 years ago this month. With annual inflation exceeding 12% in the first quarter of 1951, the Fed was under pressure to raise interest rates. But at the time, the Korean War was underway, and the Treasury Department wanted to lower interest rates to make it easier to finance the associated debt. In January of that year, after a series of increasingly acrimonious squabbles, the Fed went against the Treasury Department by lowering the price of bonds, effectively raising rates.
Enraged, President Harry Truman summoned the Federal Open Market Committee to the White House and accused its members of jeopardizing the fight against communism. The White House then announced to the press that the FOMC had agreed to “preserve the stability of government securities,” and the Treasury Department issued a statement that the low interest rate on government bonds would be maintained.
Fed Board of Governors member Marriner Eccles was defiant. He leaked the minutes of the White House meeting, which showed that the FOMC had done no such thing. Several more weeks of wrangling ensued. But on March 4, an agreement was announced between the Treasury Department and the FOMC that gave the Fed full authority over monetary policy. Inflation fell rapidly. Eccles became a symbol of the Federal Reserve, and the building that houses the main office of the Board of Governors was named in his honor.
The second episode occurred 20 years later. Fearing a weakening economy during the campaign, President Richard Nixon tried to get the Fed to ease monetary policy in the summer of 1971. His administration orchestrated a series of leaks that made it clear that he and Fed Chairman Arthur Burns were in conflict. Reports indicated that Nixon was considering either expanding the Fed Board or reducing its independence by subordinating it to the executive branch, and that he had rejected Burns’s request for a pay raise-though Burns had never asked for one.
Unlike Eccles, however, Burns capitulated and pursued an unusually loose monetary policy in 1972. As a result, price increases accelerated, which, combined with the commodity price shock, led to the worst spike in U.S. inflation since World War II.
These episodes hold important lessons. First, sometimes central bankers must publicly defend themselves. Powell probably had the Eccles precedent in mind when he decided to release a statement disclosing a Justice Department investigation into his testimony before the Senate Banking Committee about renovations to Fed headquarters (including, ironically, the Eccles building). “The threat of criminal prosecution,” he stated bluntly, “is a consequence of [the Fed] setting interest rates based on our best judgment of what will serve the public interest, not according to the President’s preferences.
The second lesson that Powell also appears to have learned is that letting politicians dictate monetary policy can have long-term consequences. “Start-stop” monetary policy in the 1970s – a direct result of Burns’ agreement with Nixon – led to a rise in inflation expectations. This trend was reversed only after Paul Volcker took over the Fed and resorted to a prolonged maintenance of high interest rates to restore confidence in policy. The price of this adjustment was high: the “Volcker shock” contributed to the 1980-82 recession, during which unemployment reached double digits.
In contrast, anchoring long-term inflation expectations at 2 percent in 2021-23 almost certainly held down inflation and allowed disinflation to occur without seriously weakening the labor market. With inflation still moderating but stubbornly above the Fed’s 2% target, this is a particularly unfavorable time to question the Fed’s independence.
However, there are new threats looming over that independence that may require additional action. Like Nixon, Trump may want to lower the unemployment rate to improve his political prospects. If the public concludes that the central bank will tolerate slightly higher inflation for political purposes, companies will start raising prices in advance. The result will only be higher inflation. Interrupting this political-monetary cycle is one of the main reasons Congress created an independent central bank.
Eccles, who played an important (though somewhat reluctant) role in drafting the Banking Act of 1935, which established the modern Fed, recognized the important role of Congress in ensuring the operational independence of the central bank. As he said in his 1951 speech recognizing his role in the leak of the Truman meeting minutes, the Fed has “not only the authority but the responsibility” to fight inflation. “If Congress doesn’t like what we are doing, it can change the rules.”
This brings us to the third lesson: If the president targets the Fed’s independence, Congress must stand up to defend it. Recent pledges by key U.S. senators to oppose the confirmation of any of Trump’s nominees to replace Powell or other Fed board members until the “legal issue” is fully resolved is a step in the right direction.
But Congress has a second task, as evidenced by the 1951 conflict. In that case, the pressure to hold interest rates was motivated not by politics but by the need to finance a large budget deficit. During World War II, the Fed kept rates low for this reason. While current federal spending as a share of GDP pales in comparison to what it was during World War II or the Korean War, the size of the federal debt is historically large and is projected to continue to grow. Unless Congress acts to reduce the budget deficit, financing Treasury debt will become increasingly difficult, and challenges to the Fed’s independence will intensify.
The DOJ investigation comes at a difficult time for monetary policy. The lack of data resulting from the prolonged government shutdown in 2025 will continue to make it difficult to analyze the economy’s performance. The Trump administration’s tough action on immigration further distorts the picture, as wage growth numbers that typically signal a recession may become the new normal. In challenging times, Fed policymakers should welcome genuine disagreement about policy and avoid encroaching on the institution’s independence. They may need help.
Gabriel Chodorow-Reich,
Professor of Economics at Harvard University, he is a research associate
at the National Bureau of Economic Research, a visiting scholar
at the Federal Reserve Bank of Boston, and a member of the Academic Advisory Council
of the Federal Reserve Bank of Dallas.
© Project Syndicate, 2026.
www.project-syndicate.org
