Policymakers urge Donald Trump to respect the Fed’s autonomy

According to the Financial Times (FT), current and former policymakers have cautioned Trump against undermining the U.S. Federal Reserve’s autonomy during his second term. President-elect Trump has previously expressed his wish to have a say in the Fed’s decisions, especially on interest rate cuts.

The lawmakers reportedly expressed concerns over Trump’s potential interference with the Fed, saying it could destabilize the U.S. economy and global financial markets. The FT reported that Trump had turned against his appointee Powell in 2017, branding the Fed chair an “enemy” and “clueless” for resisting his demands for lower interest rates. 

Trump’s attempt to interfere with the Fed’s policies could be tragic

Fed Chair Powell sent a warning shot to President-elect Trump on Thursday, given fears that his planned enactment of sweeping tariffs, mass deportation of immigrants, and lowering taxes could trigger price pressures. The FOMC had just voted to cut interest rates by a quarter-point to the 4.5%-4.75% target. 

According to Reuters, the Fed is expected to face a hostile White House despite inflation dropping to a 2.4% annualized rate and unemployment sitting at 4.1%. Essentially, Trump’s avowed policies and meddling tendencies threatened to cut these Fed’s success stories short. The main problem is that Trump had subtly shown his intentions to undermine the Fed’s hard-earned independence.

However, Bloomberg reported that Trump’s advisors cautioned him against his intended retaliatory decisions to fire or demote Powell given the associated legal limits. Powell explicitly stated that he would not step down if asked to. Powell’s term as Fed chair will end in 2026, while his 14-year term as a governor will end in 2028.

Reuters reported that Trump shared former president Richard Nixon’s sentiments that the Fed should respect his views. 

“I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether or not the interest rates should go up or down.”

–Donald Trump 

According to the FT, Trump’s advisors warned their boss that speculations he could appoint a sycophant to head the Fed for his own benefit was enough cause for concern. They believed that such insinuations only heightened the risk of stagflation. 

The law protects the Fed’s independence against presidential meddling 

🇺🇸 What a Reelected Trump Can and Can’t Do to Sway the #Fed – Bloomberghttps://t.co/fVZQDWJY1w pic.twitter.com/nxwqpKGuBl

— Christophe Barraud🛢🐳 (@C_Barraud) November 7, 2024

The president’s direct powers over the Fed only allowed for the naming of appointees. Furthermore, the Senate must confirm the president’s appointees to the positions of Fed governor, chair, and vice chair. 

Firing any of the ‘non-compliant’ Fed officials is also an uphill legal task that both Republican and Democrat presidents have failed to accomplish. Presidents from both parties have unsuccessfully tried to influence the Fed through public and private pressure.

Powell emphasized that the Fed aimed to be apolitical and only considered policies that were best for the country’s economy. He also added that lawmakers from both sides of the aisle supported the Fed’s independence.

The argument for the Fed’s independence was that the economy would benefit more in the long run if consumers and investors believed the central bank would do what was necessary without fear of political consequences.