The last time a US president put such pressure on the Federal Reserve was Nixon in 1971. Two years later, the United States entered an era of stagflation.

Written by: Ye Zhen, Wall Street Insights

Trump is threatening the Federal Reserve's independence through a series of tweets, and the last time a US president exerted such pressure on the Fed was in 1971, on the eve of the Great Inflation era.

In 1971, the US economy was facing a "stagflation" dilemma, with unemployment reaching 6.1%, inflation exceeding 5.8%, and continuous expansion of international payment deficits. To seek re-election, President Nixon exerted unprecedented pressure on Fed Chairman Burns.

White House records show that in 1971, Nixon's interactions with Burns significantly increased, especially in the third and fourth quarters, with 17 formal meetings per quarter, far exceeding the usual communication frequency.

This intervention manifested in policy operations: that year, the US Federal Funds Rate dropped from 5% at the beginning of the year to 3.5% by year-end, and M1 money supply growth reached a post-World War II peak of 8.4%.

In this year of Bretton Woods system collapse and global monetary system transformation, Burns' political compromise laid the groundwork for the subsequent "Great Inflation", which was only resolved when Paul Volcker significantly raised interest rates after 1979.

Burns thus bore the historical condemnation. Today's Powell absolutely does not want to replay Burns' fate.

Burns' Compromise: Political Interests Overriding Price Stability

In 1970, Nixon personally nominated Arthur Burns as Fed Chairman. Burns was an economist from Columbia University and had been Nixon's economic advisor during the campaign. The two were close, and Nixon had high hopes for Burns - not as a monetary policy gatekeeper, but as a "collaborator" in political strategy.

At the time, Nixon faced enormous pressure to seek re-election in the 1972 election, and the US economy had not yet fully recovered from the 1969 recession, with high unemployment. He urgently needed an economic growth wave, even if it was a false prosperity created by "flooding the market".

Thus, he continuously pressured Burns, hoping the Fed would lower interest rates and increase money supply to stimulate growth. White House internal recordings documented multiple conversations between Nixon and Burns.

On October 10, 1971, in the Oval Office, Nixon told Burns:

"I don't want to go out of town fast... If we lose, this will be the last time Washington is governed by conservatives."

He implied that if he failed to be re-elected, Burns would face a future dominated by Democrats, with a completely changed political atmosphere. Facing Burns' attempt to delay further easing policies by claiming "the banking system is already loose", Nixon directly refuted:

"Liquidity problem? That's just Bull."

Shortly after, in a phone call, Burns reported to Nixon: "We've lowered the discount rate to 4.5%."

Nixon responded:

"Good, good, good... You can lead 'em. You always have. Just kick 'em in the rump a little."

Nixon not only pressured policy but also made clear statements in personnel arrangements. On December 24, 1971, he told White House Chief of Staff George Schultz:

"Do you think we've influenced Arthur enough? I mean, how much more pressure can I put on him?"

"If I have to talk to him again, I'll do it. Next time I'll just bring him in."

Nixon also emphasized that Burns had no right to decide Fed board members:

"He needs to understand, just like Chief Justice Burger... I'm not going to let him name his people."

These dialogues from White House recordings clearly demonstrate the systematic pressure from the US president on the central bank chairman. Burns indeed "followed along" and developed a theory to justify his actions.

He believed that tight monetary policy and the resulting unemployment were ineffective in curbing inflation, as inflation's roots lay in factors beyond the Fed's control, such as unions, food and energy shortages, and OPEC's oil price control.

From 1971 to 1972, the Fed lowered interest rates and expanded money supply, driving a brief economic boom and helping Nixon achieve his re-election goal.

But the cost of this "artificially created" economic prosperity quickly became apparent.

Powell deeply understands this and absolutely does not want to become the next Burns.