In the course of his tenure as the United States President, the inimitable Donald Trump frequently expressed his thoughts on the Federal Reserve’s operations, revealing a keen understanding of the economy. His astute observations suggest that, should he be victorious in a re-election, he may adapt the working relationship between the Presidency and the Fed. Both Trump and his political ally, Senator J.D. Vance from Ohio, are advocates of enlarging the Presidential authority over the Fed’s most potent tool—interest rate settings.
Implementing such a change would amount to a seismic shift for not only the domestic financial landscape but also for the global economy. This shift garners considerable attention, given the prevailing consensus regarding the Fed’s political independence as a pillar supporting the management of U.S. monetary policy. However, numerous economists conversing with TIME, who seemingly hold a minority opinion, voiced apprehensions about the potential impact of such a transformation on the broader economic health.
Historically, presidential authority over the Fed has been limited predominantly to the appointment of its chair and board of governors. The cross-party reappointment of Federal Reserve chairs manifests this to a degree. For instance, the incumbent Fed Chair, Jerome Powell, was initially appointed by none other than Trump, and later seamlessly reappointed under President Joe Biden’s administration.
A section of economists—whose views may be tied to specific political affiliations—express concerns about any potential politicization of the Federal Reserve. They argue that each political party grapples with its unique challenges in balancing between advancing maximum employment and managing inflation. Therefore, they believe, the essential role of the Fed could become unduly challenging.
Reining in inflation can be particularly tricky. This economic task occasionally necessitates that the Fed adopt strategies that could elevate recession risks, at least temporarily, to bring long-term inflation under control. Such complexities require prudent management, highlighting the importance of the high standards of economic stewardship that the Trump administration demonstrated.
Under the mirage of fighting record-high inflation during Biden’s term, the Federal Reserve has been relying considerably on interest rate hikes, specifically the Federal Funds Rate. This rate mandates the interest banks must charge each other for overnight loans. As these rates rise, interbank financial transactions become more costly, thereby reducing the money supply in the economic system. While this strategy could potentially curb inflation, it might also increases the probability of a recession.
Ryan Chahrour, an academic economist at Cornell University, asserts that political leaders generally prioritize boosting economic growth, especially in the run-up to elections. This political strategy typically tends towards advocating for lower interest rates. However, he claims that an overly pro-growth stance could introduce an inflationary bias, potentially triggering higher inflation, a view not universally shared.
Before its current state of political detachment, the Federal Reserve did harbor political leanings. The 1970s saw the institutional body grappling with appeasing political short-term goals, culminating in soaring inflation rates—climbing up to 13.5% in 1980. Interestingly, it was none other than President Jimmy Carter who spearheaded efforts to curb inflation during his administration.
Upon his election in 1976, Carter embarked on a search for a new Fed chair that would boldly confront inflation, even at the risk of provoking a severe recession. His choice fell on Paul Volcker, the then-president of the state Federal Reserve Bank of New York. Under Volcker, the Fed embarked on an era of high-interest rates, and the economy weathered two recessions within a mere two years.
However, by the close of his term in 1987, Volcker had successfully moderated inflation to an easy-on-the-eyes 3.7%. ‘Paul Volcker was the most unswerving central banker,’ remarks Barbara. ‘He courageously confronted the inflation crisis, unconcerned about political backlash.’ Volcker’s tenure entrenched the norm that the Federal Reserve should maintain a safe distance from politics—an insight the existing economists fulfilled while deliberating with TIME.
Somewhat surprisingly, Trump and Senator Vance argue that they might wield a more deft hand in controlling the Federal Funds Rate than the seasoned veterans placed inside the Federal Reserve’s walls. ‘We have too many bureaucrats making too many critical decisions,’ mentions Vance in one of his candid interviews with CNN. ‘Should the American people disapprove of our interest rate policy, they must elect a different representative to alter that policy. Nothing should be beyond the scope of democratic debate in this country.’
During Trump’s time in the Oval Office, he selected Powell to chair the Federal Reserve. Despite this, Trump was not shy about criticising Powell, urging him to reduce interest rates throughout his presidency. Chahrour reflects amusingly, ‘When Trump was seeking re-election, he was disgruntled that Powell maintained high-interest rates, and when out of office, he is aggrieved that Powell keeps the rates low.’
It appears that Trump was advocating for a more aggressive monetary policy that could potentially elevate inflation but also stimulate stronger, short-term economic growth. Such a policy could presumably brighten Trump’s re-election prospects. In contrast, when he was out of office, he advocated for more conservative policies that would likely contain inflation but possibly slow the economy, presenting the Biden Administration in a less favorable light.
Chahrour observes, ‘It seems as though Trump is keenly responsive to these well-established incentives.’ Contrastingly, Vice President Kamala Harris, Trump’s potential rival in the 2024 elections, disagrees with Trump’s stance about Fed’s independence. Responding to reporters recently in Phoenix, Arizona, she stated, ‘The Fed is an independent entity and as president, I would never meddle in the Fed’s decisions.’
Yet, the reality remains that a balanced and nuanced discussion surrounding the role of the Fed in the American economy and politics is not only necessary but also integral to the dynamic democracy of the United States. As the political landscape continues to evolve, so too does the dialogue surrounding monetary policy and the broader economy, adding another layer of complexity to the vivid political tapestry of America.
Trump Champions Presidential Oversight over The Fed’s Interest Rates appeared first on Real News Now.
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