President Trump’s recent attack on the Federal Reserve is a breach of protocol that both Republican and Democratic presidents have observed for decades.

According to Stanford GSB finance professor Darrell Duffie, Trump is picking a fight with the Fed that he ultimately won’t win. It’s not only that the Federal Reserve has carefully created a political independence over the past half-century, says Duffie. It’s also that Fed officials recognize their jobs may become much more difficult if investors and the public suspect that the central bank could yield to political pressure.

Available Quotes:

“The Federal Reserve operates on the principle that it must maintain not only its actual independence but also the public perception of its independence,” Duffie says. “They know that every nudge of that perception away from independence is not good. As a result, they will be very cautious about lending any credibility to the idea that the Fed would follow short-term, politically motivated advice.”

“Independence is like currency — it’s money in the bank,” Duffie says. “The Fed wants to keep a good stock of it on hand, and doesn’t want to use it up unnecessarily. Any time the Fed appears to succumb to political pressure — it would not, but even if it just appeared to succumb — a little bit of that currency would be used up.”

“I have no doubt that Chairman Powell and the Fed as an institution are entirely aware of precisely those risks,” Duffie says. “That’s why, despite the interference from President Trump, I expect the Fed to guard its independence and to continue its focus on maintaining both stable prices and high employment.”

Darrell Duffie Bio:

Darrell Duffie, Dean Witter Distinguished Professor of Finance at the Stanford Graduate School of Business, and professor by courtesy, Department of Economics, Stanford University, has been on the finance faculty at Stanford since receiving his Ph.D. from Stanford in 1984. His research interests include over-the-counter markets, banking, financial risk management, credit risk, valuation and hedging of derivative securities, financial market infrastructure, the term structure of interest rates, financial innovation, security design (including legal treatments at failure resolution), and market design.

To schedule an interview, please contact Jacqueline Wasem at [email protected]