I sure was appalled at how bad an idea it was. A president’s got a lot of
things to do at any given moment and is actually much less close
to the economy than the 19 Fed board members and presidents. https://t.co/UuHrM1p3VE— Lawrence H. Summers (@LHSummers) August 9, 2024
Donald Trump expressed his desire to have a “say” in setting interest rates if he is reelected, raising concerns over the potential reduction in the Federal Reserve’s independence. Trump made these remarks at a news conference held at his Mar-a-Lago club in Florida. “I feel the president should have at least a say in there, yeah, I feel that strongly,” Trump stated.
Vance backs Trump on the notion the president should have a say in interest rates
Calls it a “fundamentally political” decision
— Gram Slattery (@G_Slattery) August 11, 2024
The comments add to a series of ideas floated by Trump’s allies that could undermine the Fed’s independence, including proposals that would grant the president a role in setting interest rates. Trump has previously asserted that he believes he has the authority to fire the Federal Reserve chair. “In my case, I’ve made a lot of money.
The President and the Senate of the United States can and should influence the monetary policy rule, through appointments. But meeting-to-meeting monetary policy decisions should be left to the Fed. Rightly blame any departure for serious future inflationhttps://t.co/qMAQ0SYFbM
— Miles Kimball (@mileskimball) August 10, 2024
I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman,” Trump said. Trump said Powell and his colleagues have “gotten it wrong a lot,” noting that Powell “tends to be a little bit late on things.” He suggested that any rate cuts before the election would unfairly benefit Democrats. Trump, in a recent interview, said he would allow Powell to serve out his term if reappointed, “especially if I thought he was doing the right thing.” Powell affirmed his intention to stay through the end of his term, which ends in May 2026.
More political control over monetary policy superficially seems bad, but this is gold. https://t.co/BGC8W9DTDM pic.twitter.com/4tQTpvohOL
— Tom Davidoff (@TomDavidoff) August 11, 2024
Stephen Moore, a Trump confidant, mentioned that once Powell’s term expires, they might seek someone new who aligns closer with Trump’s economic viewpoint. Potential candidates include Judy Shelton, Larry Kudlow, and Arthur Laffer. Judy Shelton has publicly questioned the need for the Federal Reserve and argued against the notion that a pre-election rate cut would be apolitical.
Trump also acknowledged his tumultuous relationship with Powell, whom he appointed as Fed Chair in 2018. Republican vice presidential nominee JD Vance supported Trump’s suggestion that presidents should have more control over U.S. monetary policy. “President Trump is saying something really important and actually profound, which is that the political leadership of this country should have more say over monetary policy,” Vance stated.
Bank of America CEO Brian Moynihan voiced concerns about such a significant shift, noting that economies with independent central banks generally fare better. Vance avoided taking a definitive stance on Florida’s upcoming referendum to repeal Republican-passed abortion restrictions. He emphasized Trump’s position that abortion should be decided on a state-by-state basis.
Vance’s past controversial comments about American families resurfaced, particularly a remark from 2021 where he described Democrats as “childless cat ladies.” He reiterated that his comments were sarcastic but aimed at critiquing anti-family policies.
Trump’s interest rate control proposal
The Fed was created as an independent entity more than a century ago.
Historically, presidents from both parties have agreed to respect its autonomy. The organization was specifically designed to be nonpartisan to ensure economic stability over the long term without being pressured into policy decisions by an administration seeking quick wins. Vance said: “Agree or disagree, we should have America’s elected leaders having input about the most important decisions confronting the country.
It would be a huge change, but whether the country goes to war or what our interest rates are are important questions that American democracy should have important answers to.”
Powell has been keen to detach himself from the debate. “We’re a nonpolitical agency. We don’t want to be involved in politics in any way,” he said earlier this month.
Across the world, interest rates are primarily set by autonomous central banks, usually to control inflation and maximize employment. Every G7 nation has an independent body deciding its base rate. The risk of changing interest rates via an election is that, during a period of inflation with prices rising, the public might refuse to vote to make the cost of money more expensive by increasing the interest rate, despite it being a necessary measure to rebalance supply and demand and bring down prices overall.
The Fed is not “above” democratic debate—the president nominates the chairman—but its actions are independently decided by a committee of economists across the States. Politicians are focused on the next election, and their impulse is to step on the gas as hard as possible to maximize their chances of winning and then worry about the consequences later. Tyler Cowen, an economics professor at George Mason University, suggests that the Fed could be held more accountable for its decisions via an executive-branch review process, as is the case for the Social Security Administration and the Securities and Exchange Commission.
The White House also published an analysis of the significance of the Fed staying an independent entity. The analysis stated: “A central bank’s credibility is bolstered by its independence, and such credibility is also key to maintaining long-term, anchored expectations. When credibility is undermined by political influence, people, firms, and others who set prices are less likely to believe the central bank’s commitment to lower inflation, which can induce higher inflation.”
Wall Street analysts haven’t lost faith in the Fed’s credibility yet.
According to Paul Donovan, chief economist at UBS Global Wealth Management, “It may well be that markets choose not to price the risk of Fed independence being undermined. Investors seem inclined to dismiss Trump’s policies with more extreme economic outcomes because the former president is not serious. If there were evidence that Trump was serious about these policies, markets would probably react.”
