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Trump Contemplates Federal Reserve Changes Post-Election—What's on the Table?

A cadre of former officials and allies of ex-President Donald Trump has composed a document detailing proposed policy alterations that would impact the Federal Reserve's authority and autonomy. While it remains uncertain whether Trump himself was directly involved, some sources suggest his tacit approval of the endeavor. Trump has conveyed to his advisors his preference for a low-interest-rate environment and has publicly criticized the central bank's monetary policy decisions, particularly targeting chairman Jerome Powell as "political."


Interestingly, the document proposes changes that could render the Federal Reserve more susceptible to political influence. For instance, it suggests granting the president oversight over federal funds rate determinations and empowering the president to demote Powell before the conclusion of his term.


Policymakers across the political spectrum who value the Fed's independence, including former Trump administration officials, have voiced concern over the prospect of White House intervention in the Fed's decision-making processes and have cautioned about potential adverse effects on the global economy if such interventions materialize. Conversely, some of Trump's advisors argue that it is unconstitutional for the Fed to operate without interference and contend that the Fed's independence leads to policy mistakes that harm the U.S. economy.


The feasibility of stripping the Fed of its autonomy is uncertain, as such a policy would encounter numerous institutional hurdles. Moreover, Trump's senior advisors assert that the proposed policy recommendations should not be regarded as official at this juncture. Nonetheless, as discussions about the optimal role of the central bank intensify, it is prudent to consider the potential ramifications of curtailing the Fed's independence.


Rationale Behind Fed Independence

The Fed's primary objectives are to uphold maximum employment, a metric that reflects various labor market factors, and to maintain stable inflation at a 2% annual rate. It pursues these goals primarily through monetary policy adjustments, chiefly by altering the target for the federal funds rate to stimulate or constrain economic growth and consumer demand.


Congress determined that the Fed is most effective when it formulates monetary policy decisions based solely on economic conditions. Consequently, Congress established the central bank as an independent entity to shield it from political pressures. This arrangement aims to prevent the federal government from manipulating interest rates for political gains, even if such loose monetary policy would be detrimental to the economy in the long run.


Although the Fed is accountable to Congress and subject to independent audits, its independence allows for objective economic data to guide policy decisions. Additionally, while the president nominates members of the Fed's board of governors and the Senate confirms these appointments, the president lacks the authority to remove a governor due to policy disagreements. Furthermore, Fed governors serve staggered 14-year terms, making it challenging for a president to entirely reshape the board according to their political preferences.


Historical evidence suggests that independent central banks are more adept at maintaining price stability. Studies by the International Monetary Fund indicate that countries with independent central banks experience lower inflation rates and achieve superior long-term economic outcomes.


However, achieving credibility and accountability is crucial to realizing these benefits. Some argue that excessive operational independence within a federal agency undermines democracy and that freedom from political influence necessitates a balance between independence and accountability. For instance, the Manhattan Institute advocates for restructuring the Fed's governance to enhance White House oversight while also permitting greater democratic involvement of Reserve Bank leaders in monetary policy decisions.

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