Can Trump Influence the Federal Reserve and Lower Interest Rates?
President-elect Donald Trump is planning to retake the White House with a series of bold promises, including lower interest rates.
U.S. households frustrated by two years of economic growth High borrowing costs. But the president has no authority to reduce mortgage interest ratecredit card APR or business loan interest rate. Interest rates are the result of a combination of economic factors, including the Federal Reserve’s monetary policy.
The Federal Reserve – the country’s central bank – began gradually lowering its benchmark interest rate in the fall. The Federal Reserve’s chief policy-making body will meet again next week and is expected to cut interest rates by another 25%.
While Trump will have the power to name a new Fed chairman in 2026, he will not have the ability to directly set monetary policy or change the federal funds rate.
There is a long history of presidential attempts to interfere with central bank autonomy. trump during his first term as president Threatening to oust Fed Chairman Jerome Powell After the Federal Reserve starts raising interest rates. Recently, the president-elect said he would not try to fire Powell before his term as Fed chairman ends in 2026.
Here’s a detailed look at what Trump can and can’t do when it comes to interest rates and the Fed.
Who decides the interest rate?
The Federal Reserve sets the federal funds rate, which is the base rate banks pay to borrow money. This target rate range indirectly affects the short-term interest rates that banks and lenders then charge customers on everything from credit cards to home and car loans.
The Fed lowers and raises its benchmark interest rate in order to keep prices relatively stable (the ideal annual inflation rate is 2%) and unemployment low. Peter C. Earl, Senior economist at the American Institute for Economic Research.
To understand how this works in practice, think back to the early days of the COVID-19 pandemic. During the economic downturn in 2020, Fed cuts interest rates to zerohoping to encourage consumption and investment at a time when people and businesses are hesitant. Then, when the economy rebounds two years later, Fed raises rates to combat rapid inflation.
What is the relationship between the Federal Reserve and the government?
Fed Created by Congress in 1913 and the Federal Reserve Act. Congress can amend the act to change how the Fed operates.
The president’s primary relationship with the Federal Reserve is through his power to appoint the Fed’s chairman and other board members. Presidents often appoint members to the Federal Reserve Board of Directors who are consistent with their worldview. However, no one president has the ability to completely reshape the Fed because appointments are staggered, said Sarah Binder, a political science professor at George Washington University.
In theory, Trump could push changes to the Federal Reserve Act through the Republican-controlled Congress. However, Binder said any changes to the rules governing the Fed would require a bipartisan coalition of 60 votes to pass the Senate.
|
what the president can do |
What the president can’t do |
|
Appointment of new Fed Chairman in 2026 (members of the Fed Chairman’s Board of Directors are generally appointed upon expiration of the term) |
Fire the Fed chair over a simple disagreement. The Fed chairman can only be removed from office “for cause,” such as misconduct or malfeasance in office. |
|
Express concerns about monetary policy by publicly criticizing the Fed’s actions. |
Rates are set directly for the state or banking institutions. |
What power does Trump have over the Fed?
In 2018, during his first administration, Trump appoints Current Federal Reserve Chairman Jerome Powell. Two years later, Trump calls him ‘the enemy’Powell’s term ends in 2026, and the president may not have the power to remove him before then. Asked in early November whether the president could fire or demote the Fed chairman or other Fed governors, Powell responded: “Under the law.”
Earle said Federal Reserve Board members can only be removed from office “for cause,” meaning there is proven misconduct or malfeasance or an inability to perform their duties due to illness. Simple disagreements on policy or the president’s frustration with interest rates are not enough on their own. “None of these are valid grounds for eviction,” Earle said.
The president does have another kind of unofficial power over the Fed: the “bully pulpit.” Some presidents are known to complain about the Fed when the economy is down, forcing them to take one action or another. Trump himself did so during his first term, threatening to oust the Fed chairman in March 2020 when the economy nearly collapsed. Experts agree that Trump is likely to make such comments again.
“I don’t think anyone expects the president, especially in these times, to have their hands completely tied behind their back,” Binder said.
Is the Federal Reserve really nonpartisan and independent?
In theory, the Fed is independent, but in practice this is not always the case. Earle believes that it is almost impossible for an entity as important as the Federal Reserve to be completely above politics.
The Fed has several structures in place that insulate it from outside influence: long-term terms for board members, staggered appointment schedules, and forecasts of removals with cause, for example. All of this is designed to give the Fed some autonomy and protect it from the whims of political leaders.
But ultimately, the Fed operates in the middle of the political system. “It can’t be sealed,” Binder said.
How will Trump’s policies affect future rate cuts?
Experts say Trump’s broader economic policies are unlikely to result in faster or deeper interest rate cuts. In fact, they may have the opposite effect.
Trump’s proposed tariffs on foreign imports could lead to more inflation, which could influence the Federal Reserve to raise interest rates again, as it often does to combat inflation. Dean BakerSenior Economist, Center for Economic Policy and Research.
But experts say Trump’s biggest impact may be the sheer uncertainty he inspires, which could roil financial markets. His freewheeling policy pronouncements often sway policymakers, who are unsure exactly which direction he will take. Trump’s threat to fire Powell, whether or not he (or is able to) follow through, only adds to the instability.
