Former President Donald Trump said on Thursday that presidents should "have at least a say" on monetary policy and interest rate decisions by the Fed.
The comment signals the Republican presidential nominee’s potential interest to influence Fed policy in the event he wins the 2024 election and returns to the White House.
This position would steer the country away from the status quo, wherein the Fed enjoys independence from the executive branch.
The Case For An Independent Fed
Advocates of an independent Fed, who include Fed Chair Jerome Powell, argue that executive independence allows the Fed to base its decisions purely on economic outcomes without influence from political parties.
In July, Powell said in testimony before the Senate "the record is pretty clear" on how effective the Fed’s blueprint is, and called it “a good institutional arrangement that serves the public well.”
The present economic scenario offers a perfect example of how a politically influenced Fed could make decisions that are not in the pure interest of fulfilling its duties as a central bank.
After more than a year with a federal funds rate at between 5.25% and 5.5% — and well over two years since the last hike cycle began — the Fed is experiencing mounting pressure from several corners to begin easing rates.
In the context of an upcoming presidential election, the state of the economy will influence the electorate’s perception of the administration's success at steering the country.
Any decision to either lower, maintain or hike interest rates will have immediate consequences in the market, which can influence public opinion about the government.
If the Federal Reserve is susceptible to political influence, it might postpone making a decision until after the election, which could lead to unintended economic consequences.
How Could Trump Influence The Fed? Has He Done It Before?
In April, a group of Trump allies drafted a 10-page document outlining possible means to grant the U.S. president the ability to influence Fed policy.
Possible approaches range from making incremental policy adjustments to more significant changes that would enable the president to review Federal Reserve regulations before they are enacted.
At the time the document was made public, it wasn't yet clear that Trump himself was behind such ideas. Recent comments by the former president have made that position clear.
In July, Powell downplayed any worries of losing Fed independence in the event of a Trump win, although the group of Trump allies suggested the former president could oust Powell before the end of his term in the event of a victory.
Powell was appointed to his position by Trump in 2017, and his role was reconfirmed in 2021 by President Joe Biden. His term will officially end in 2026.
"I am not focused on that at all. And that's not just a talking point. I really think that we just keep doing our jobs," Powell said.
Interest Rates During The Trump Years: Trump has previously expressed frustration over not being able to influence interest rates during his four years as president.
During his term, the Fed was in an upward interest rate cycle that started in December 2015 and lasted until July 2019, taking rates up to a ceiling of between 2.25 and 2.5%.
His position on interest rates has varied. In 2015, as a presidential candidate, he said that low interest rates were creating "a very false economy" and that savers "are getting just absolutely creamed," according to a Cato report on the Trump presidency.
In 2016, he declared himself "a low interest-rate person," and in 2017 he accused then-Fed Chair Janet Yellen of keeping interest rates low to benefit President Barack Obama's economic performance.
In 2018, Trump was the first president in decades to criticize Fed policy, saying the central bank's decisions to raise rates were hampering his efforts to spur economic growth in the midst of a bear market, according to The Washington Post.
That same year, Trump argued that higher rates made the U.S. dollar stronger against world currencies like the Euro and the Chinese Yuan, making U.S. products more expensive for foreign buyers. This dynamic played against Trump's campaign to lower U.S. trading deficits against major partners like the EU and China.
There's no evidence to presume that Trump was able to directly influence Fed policy during his presidency. But a separate Cato analysis argued that Trump's fiscal policies were able to indirectly influence the Fed's actions by challenging the very structure of its monetary strategy, by maintaining a large budget deficit.
For his part, Biden has been a lot less vocal on Fed policy. His remarks on the topic have been restrained to celebrating lower inflation and predicting Fed actions based on macroeconomic progress.
In April, the Biden administration released a statement underlying the importance of central bank independence after the policy guidelines by Trump allies were made public.
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