In a 2nd Trump term, Fed independence would go “out the window,” economist says

Here at Marketplace, we talk about the Federal Reserve almost every day. Its political independence plays a key role in achieving its dual mandate of price stability and maximum employment. On a special episode of “Marketplace,” host Kai Ryssdal explores what it would mean for the global economy if the Fed lost its political independence — something Donald Trump has talked about both during his presidency and his current campaign. 

What does “Fed independence” mean?

In the Fed’s own words, it was “designed to carry out its responsibilities without interference or control from the vested interests inherent in electoral politics, fiscal policymaking, and private banking.” In practice, the central bank’s independence has evolved since it was created by the Federal Reserve Act in 1913. 

The members of the Board of Governors, including the chairman, are nominated by the president and confirmed by the Senate. Nowadays, the president doesn’t have any say in the Federal Open Market Committee’s interest rate decisions. But for the first few decades of the Fed’s existence, the Treasury secretary was part of the board, and in the 1940s, the Fed kept interest rates low at the Treasury Department’s request to help finance World War II. Our modern era of Fed independence began in 1951. 

Studies show that central banks with a higher degree of independence are better at maintaining stable prices. The reasoning is that electoral politics operate on relatively short time lines — for example, four years for a presidential term. A president might want low interest rates, which can be popular with the public, to help with reelection.

But low interest rates might not be good for inflation. Take the inflation of the last few years. 

“It is generally recognized and appreciated that if the Federal Reserve’s monetary policy decisions were subject to congressional or presidential override, short-term political forces would soon dominate,” Alan Greenspan, a five-term Fed chair, said in 1996. “The clear political preference for lower interest rates would unleash inflationary forces, inflicting severe damage on our economy.”

Several presidents — Lyndon B. Johnson, Richard Nixon, George H.W. Bush — have condemned the Fed’s interest rate decisions or advocated for lower interest rates. But aside from Donald Trump, no president, starting with Bill Clinton, has publicly criticized Fed decisions, threatened to fire the Fed chair or demanded a say in interest rate decisions.

The president of the United States has the power to remove a Federal Reserve governor “for cause.” Legal experts generally agree that a policy disagreement does not meet this standard, but no president has tried to remove a board member, and the standard has never been tested in court.

Ryssdal asked Alan Blinder, a member of Clinton’s Council of Economic Advisers and later vice chairman of the Federal Reserve, how the Clinton White House approached the Fed.

“Our thoughts were basically to watch the Fed, worry about the Fed and not say a word about the Fed,” said Blinder, now a professor of economics and public affairs at Princeton University. “This was, of course, to preserve Federal Reserve independence. And people don’t realize what a break from past history this was.”

Blinder signed a letter in September with more than 400 economists endorsing Kamala Harris for president.

For its part, the Fed does not wade into political waters either. At the September press conference, when the FOMC announced it was cutting rates by half a percentage point, Federal Reserve Chair Jerome Powell was asked how he responded to criticism that the cut was a political move.

“This is my fourth presidential election at the Fed, and you know, it’s always the same,” Powell responded. “We’re always going into this meeting, in particular, and asking, ‘What’s the right thing to do for the people we serve?’ And we do that, and we make a decision as a group, and then we announce it. And it’s — that’s what it always is. It’s never about anything else. Nothing else is discussed.”

What has Trump said about the Fed?

After Powell, who was nominated by Trump, began his chairmanship in 2018, the Fed continued gradually raising interest rates. In an interview that year with The Wall Street Journal, Trump said about Powell: “He was supposed to be a low-interest-rate guy. It turned out he’s not. … I’m very unhappy with the Fed because Obama had zero interest rates.”

Trump criticized Powell throughout his presidency, and he tweeted about the Fed at least 100 times while in office. In March 2020, during a press briefing of the Coronavirus Task Force, Trump said he was not happy that interest rates in the United States weren’t as low as they were in some other countries.

“I have the right to remove him [Powell],” Trump said. “I have the right also to take him and put him in a regular position and put somebody else in charge, and I haven’t made any decisions on that.”

As the current Republican nominee for president, Trump has continued to criticize the Fed and Powell. After the Fed announced last month’s rate cut, Trump said, “It really is a political move. Most people thought it was gonna be half of that number, which probably would have been the right thing to do. So it’s a political move to try and keep somebody in office.”

In addition to criticizing the Fed’s policy decisions, Trump has also said on multiple occasions that he believes he should have a role in interest rate decisions. This month, at the Economic Club of Chicago, he said: “I think I’m better than most people would be in that position. I think I have the right to say, ‘I think you should go up or down a little bit.’ 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 interest rates should go up or down.”

In August, Vice President Kamala Harris, the Democratic presidential nominee, said of Trump’s statements and her stance on Fed independence: “The Fed is an independent entity, and as president I would never interfere in the decisions the Fed makes.”

When Marketplace asked the Federal Reserve for comment, it pointed to statements from Powell and previous Chairs Janet Yellen, Ben Bernanke and Alan Greenspan about the importance of Fed policymaking independence.

The Trump campaign did not respond to several requests for comment.

What do the experts have to say?

Wendy Edelberg, director of the Hamilton Project and senior fellow in economic studies at the Brookings Institution

“If somebody came in and looked like they were messing with that [Fed independence], you wouldn’t just have the U.S. stock market to worry about,” Edelberg said. “You would have the international financial system to worry about.”

Edelberg, who once worked as a Fed economist, told Ryssdal that she worried that “Trump is flirting with destroying the Fed’s independence.” She noted that her concern isn’t just about Trump himself interfering in monetary policy — it’s about anyone in the world of fiscal policy having access to the Fed’s tools. 

“I worry about this a lot, because credibility is easy to lose and really hard to get back,” she said. “If the Fed doesn’t have credibility, what’s going to happen is that people are going to start to think that inflation is going to remain high, and we’re going to start building that into our behavior today. And then, if the Fed wants to convince everybody that they really mean it, we’re gonna get inflation back down to target, not only are they going to have to slow the economy with monetary policy, but they’re actually going to have to weaken the economy and pound it, just for the purpose of convincing us that we’re wrong.”

Tom Nichols, staff writer at The Atlantic, professor emeritus at the Naval War College

“I think the American people don’t understand the incredible danger of an American president saying, ‘Well, I should just be able to set interest rates.’ That’s Soviet levels of government intervention,” Nichols said. “That’s incredibly dangerous because then the rest of the world says, ‘Well, I guess the United States isn’t really a functioning economy. It’s just an autocracy where the value of goods and the value of the dollar are basically set by this ignorant authoritarian who wakes up and says, my poll numbers are down, let’s lower interest rates for a while.'”

Alan Blinder, Princeton University professor and former vice chair of the Fed Board of Governors

“If he gets elected president again,” Blinder said of Trump, “I think the political independence of the Federal Reserve goes right out the window.” Blinder worries about who Trump would appoint chair of the Federal Reserve when Powell’s term expires in 2026.

“If the Fed really lost credibility, let’s just imagine that some clown gets to be in charge of the Fed and starts behaving erratically, and people don’t know what in the world the Fed is up to,” Blinder said. “The first casualty of that will be inflationary expectations, which are built into interest rates.”

Ryssdal asked Blinder how that would affect everyday Americans — for example, a man shoveling snow in Iowa. “That guy shoveling snow in Iowa, if he wants to borrow in any way, to buy a house, to buy a car, anything, will be paying higher interest rates as his share of the penalty for the Fed’s loss of credibility.”

Daniel Tarullo, Harvard Law professor and former member of the Fed Board of Governors

“If markets begin to think that there’s going to be an administration that is going to put effective pressure on the Fed, they’re going to believe it’s going to be in the direction of lower rates, more growth and the potential for higher inflation,” Tarullo said. “The bond market is going to react, and bond prices are going to decline. Depending on how serious the threat is regarded, you may get a strong reaction in the stock market as well.”

Tarullo thinks these market movements would stop a president from destroying the Fed’s independence, and that in his opinion, threatening the Fed is bad for the administration’s own goals.