If Donald Trump is re-elected as President, he plans to have more control over U.S. monetary policy, not just relying on Federal Reserve (Fed) officials who follow his direction. This idea has raised concerns among experts, including Sylvester Eijffinger, a former advisor to the Fed, who calls it “a disastrous plan.”
In a recent press conference at Mar-a-Lago, Trump expressed that the President should have a say in the Fed’s decisions regarding interest rates. He believes his own instincts are better than those of the Fed or the current President, claiming that making decisions about monetary policy is more about intuition than expertise.
Eijffinger, who is also a professor of financial economics, finds Trump’s statements alarming. He warned that reducing the Fed’s independence could be very harmful, especially for the U.S. government bond market.
Two possible approaches
If Trump returns to office, he has two main ways to increase his influence over the Fed. First, he could try to change the Federal Reserve Act with the support of Congress. Second, he could appoint a loyal chairman who would need approval from the Senate. The market is already speculating that economists like Kevin Warsh, Kevin Hassett, Arthur Laffer, and Steven Mnuchin might be considered for this role.
While the second option doesn’t require changing any laws, some Republican advisers are pushing for major changes that would reduce the Fed’s independence. According to draft bills revealed in April by The Wall Street Journal, these changes could bring the Fed under direct control of the White House, with more supervision by the Treasury Department.
The proposed changes would also give Trump the power to remove Fed chairman Jerome Powell before his term ends in 2026. Currently, the Federal Reserve Act only allows for the dismissal of Fed members, including the chairman, “for just cause.”
Risk of higher interest rates
Eijffinger warns that if Trump succeeds in appointing a chairman who follows his orders to cut interest rates, it could damage the Fed’s credibility. If Trump also gains direct influence over interest rate decisions, this could lead to higher long-term interest rates. Wei Li, the global head of investment strategy at BlackRock, noted on Bloomberg Television that Trump’s statements could influence the interest rates the market expects for government bonds.
Jay Barry, who co-heads U.S. interest rate strategy at JPMorgan Chase & Co, added that any threat to the Fed’s independence could affect inflation expectations. If the markets see the Fed as less independent, long-term yields could rise.
Possible Fed chairman
Although Trump said last month that he might let Jerome Powell remain as chairman if re-elected, Eijffinger believes this is unlikely. He argues that Powell is too independent to be reappointed. Trump has admitted to having disagreements with Powell during his presidency, accusing him of being “too early or too late” in making decisions about interest rates.
Eijffinger suspects that Trump might choose Peter Navarro as the next Fed chairman. Navarro, a strong supporter of trade tariffs against China and a close advisor to Trump, was recently released after serving a prison sentence for ignoring a Congressional subpoena. Eijffinger describes Navarro as highly politicised and loyal to Trump, suggesting that he would follow Trump’s orders without question.
Eijffinger also questions whether Powell is completely independent, noting that the Fed often becomes more politicised during election years. However, he believes Powell will try to ensure that economic growth remains stable and that unemployment doesn’t rise sharply.
Political influence on rate cuts
Eijffinger suggests that Powell might support interest rate cuts to boost Kamala Harris’ chances if she were to run for president, though Powell would never openly admit this. Markets are already expecting a rate cut in September. If the Fed doesn’t lower rates, borrowing costs could rise, leading to tighter financial conditions.
Eijffinger emphasised that maintaining U.S. voter confidence in the economy is crucial, which is why potential rate cuts in September may also be politically motivated.
Last month, Jerome Powell strongly denied any claims that he would allow political influences to affect his decisions on interest rates, stating, “We never use our resources to support or oppose a political party, a politician, or a political outcome.”