Turkey just gave a worrying hint of the damage a Trump-run Fed might do
- Turkey's president, Recep Tayyip Erdogan, reportedly fired his central bank chief for refusing to slash interest rates.
- It's a warning for Donald Trump on how things might play out should he try the same move in the US.
- Political influence on interest rates in other countries has led not only to high levels of inflation, but also to reputational damage that can worry investors and creditors.
Turkey's president, Recep Tayyip Erdogan, reportedly fired his central bank chief for refusing to slash interest rates. Unsurprisingly, markets reacted badly, with the lira tanking and the nation's stocks tumbling.
It's a worrying template for what could happen should Donald Trump gets his wish for similar power over the Federal Reserve.
Central bank independence is a crucial element for investor confidence in a country's financial system. Political influence on interest rates in other countries has led not only to high levels of inflation, but also to reputational damage that can worry investors and creditors.
Erdogan's move will "certainly destroy what was left of the independence of the central bank," said London Capital Group analysts.
Politicians prefer lower interest rates because they can give the economy a short-term boost and shore up support among voters. But not increasing them at the appropriate time can destabilize the economy with high levels of inflation.
Turkey's lira dropped 3% and stocks dropped as much as 1.5% after Reuters said President Erdogan used his presidential decree to remove the governor of the country's central bank, Murat Cetinkaya. There are concerns borrowing costs could lower faster than expected.
There is US precedent for what can happen when political influence clouds central bank policy. Richard Nixon pressured Federal Reserve Chairman Arthur Burns to keep interest rates low in the early 1970s, the American economy entered a decade of turbulence plagued by double-digit inflation.
Trump, who has tried stacking the Fed with his own appointments, has not held back in criticizing the central bank, saying he was"not thrilled" by Chairman Jerome Powell's decision to raise interest rates and would continue to criticize the Fed if interest rates continued to rise.
In Turkey, economist Murat Uysal will take over the role after spending much of his career the state-owned Halkbank before becoming one of the central bank's deputy governors.
If Uysal does cut rates later this month, Turkey's economic problems could worsen. Trump might want to heed the lesson.