(This is the 15th in a series of AI-generated analyses of the right-wing manifesto “Project 2025: Mandate for Leadership, the Conservative Promise.“ Some chapters are reviewed out of order. Comments in italics are mine)

A deep dive into Project 2025’s Federal Reserve proposals reveals a high-stakes gamble with America’s economic future. While aiming to curb inflation and enhance predictability, these sweeping reforms risk mirroring Turkey’s recent economic turmoil, raising the specter of political interference, soaring inflation, and a hobbled central bank.

Could this end the Fed’s independence, and what would that mean for everyday Americans?

Project 2025 emphasizes the need for a more stable and predictable monetary policy by advocating for eliminating the Federal Reserve’s dual mandate. Currently, that currently includes both price stability and maximum employment. This shift aims to mitigate economic turmoil by reducing inflationary pressures. However, it also risks making the Federal Reserve less responsive to economic downturns, potentially exacerbating unemployment during recessions.

The world has observed a similar situation in Turkey: President Recep Tayyip Erdoğan has exerted significant influence over the central bank’s policies. Erdoğan’s focus on keeping interest rates low has led to severe economic instability. The resulting inflation has eroded purchasing power, increased the cost of living, and undermined economic confidence. Turkey’s situation highlights the potential danger of political interference in central bank policies, which can lead to suboptimal economic outcomes.

Another significant recommendation in Project 2025 is to limit the Federal Reserve’s lender-of-last-resort (LOLR) function. While this aims to reduce moral hazard, it could also make the financial system more vulnerable during crises. In Turkey, the central bank’s limited ability to act independently has hindered its ability to stabilize the economy during turbulent times. The 2008 financial crisis in the U.S. demonstrated the importance of the LOLR function in preventing a complete financial collapse. Restricting this function could leave the economy more exposed to financial shocks.

The chapter also proposes winding down the Federal Reserve’s balance sheet and restricting future balance sheet expansions to U.S. Treasuries. This would limit the Fed’s ability to influence the economy through large-scale asset purchases.

Turkey’s experience with a constrained central bank shows the risks of reducing monetary policy tools. Limited flexibility in responding to economic shocks can lead to prolonged periods of economic distress, as seen in Turkey’s ongoing economic challenges.

Potential Impact on the Power of the Presidency

The proposed reforms could significantly increase the power of the presidency and Congress over monetary policy. By advocating for Congress to impose stricter limits on the Federal Reserve’s mandate and operations, Project 2025 suggests a shift away from the Fed’s political independence. Historically, the Federal Reserve’s independence has been crucial in insulating monetary policy from short-term political pressures, allowing for decisions prioritizing long-term economic health over immediate political gains.

In Turkey, President Erdoğan’s control over the central bank has led to decisions that align with political goals rather than economic stability. This has resulted in high inflation, currency depreciation, and a loss of investor confidence. Similarly, if the U.S. Federal Reserve’s independence is compromised, monetary policy could become a tool for political agendas, undermining its ability to manage the economy effectively.

The proposal to eliminate the Fed’s focus on employment and to restrict its regulatory activities to maintaining bank capital adequacy further aligns monetary policy with fiscal policy, which elected officials directly control. This alignment could lead to a scenario where monetary policy becomes driven by political considerations, as seen in Turkey. Such a shift could result in policies prioritizing short-term political gains over long-term economic stability, leading to adverse economic outcomes.

Additionally, the chapter’s support for free banking or a return to a commodity-backed currency reflects a broader push toward reducing federal oversight in monetary matters. Free banking, where the government controls neither interest rates nor money supply, could increase economic volatility.

Historical examples of free banking show that while such systems can minimize inflation, they also require robust regulatory frameworks to prevent irresponsible banking practices. Turkey’s economic volatility and inflation struggles underscore the risks associated with reduced central bank oversight.

Conclusion

The proposals in Project 2025’s chapter on the Federal Reserve represent a radical shift in monetary policy and governance. While the aim is to create a more stable and predictable monetary system, the potential risks include reduced responsiveness to economic downturns, increased financial vulnerability, and the erosion of the Federal Reserve’s political independence.

By increasing the influence of the presidency and Congress over monetary policy, these reforms could undermine the Fed’s ability to manage the economy effectively and impartially. Comparing these proposals with Turkey’s recent monetary policy experience highlights the dangers of political interference in central bank operations and the potential for adverse economic outcomes.

The proposed changes might address specific economic issues, but they also introduce significant risks that could have far-reaching implications for the U.S. monetary system and broader financial stability.

Scary Quote

“Transitioning to free banking would require political authorities, including Congress and the President, to coordinate on multiple reforms simultaneously. Getting any of them wrong could imbalance an otherwise functional system.” (Yeah, do we really want to risk becoming another Turkey? That bird won’t fly.)

About the Author

Paul Winfree, Ph.D.,  served in three roles in Trump’s White House in 2017: deputy assistant to the president for domestic policy, deputy director of the Domestic Policy Council, and director of budget policy. He was also a member of the Trump transition team.

Read the Entire Series

https://thewritecoach.blog/reject-project-2025/

Read the Entire Document Here (If You Dare)

2025_MandateForLeadership_FULL.pdf