Trump’s plan to reshape the Fed is no longer just a conspiracy theory
Donald Trump’s plan to overhaul the Federal Reserve is no longer a fringe conspiracy.
On Aug. 8, Trump told reporters at his Mar-a-Lago club in Palm Beach, Florida, that the president should be consulted on matters related to monetary policy and interest rates.
“I feel that the president should have at least a say in there, I feel that strongly,” Trump said. “I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
Although Trump has long been a vocal critic of the Fed, requiring the central bank to consult the executive branch before setting interest rates would mark a big departure from the Fed as we know it.
As Johns Hopkins lecturer Kathleen Day noted, there’s been a long precedent since the first Clinton administration in 1993 that “presidents won’t put pressure on the Fed.”
Under a second Trump presidency, Fed independence would no longer be guaranteed. As The Wall Street Journal reported, Trump’s political allies have already drafted policy proposals for how the Fed should operate.
The former president has also warned Fed Chair Jerome Powell to refrain from cutting interest rates before the November presidential election.
In Trump’s view, such a move would be a political gift for Democratic nominee Kamala Harris at a time when millions of Americans are struggling with high financing costs.
Unfortunately for Trump, the Fed has little choice but to cut rates before November.
The Fed’s hands are tied
Trump isn’t the only one pressuring the Fed.
In 2022, economists and investors torched the central bank for failing to raise interest rates on time. Now, these same commentators say the central bank has waited too long to cut interest rates.
Wharton School professor Jeremy Siegel said the Fed’s failure to cut interest rates in the face of a slowing economy “makes absolutely no sense whatsoever.”
Meanwhile, JPMorgan economist Michael Feroli argues policymakers should have cut interest rates at their July meeting. In his view, “the Fed is at least 100 basis points offside,” referring to current interest rates.
“The question is no longer whether the Fed will cut in September—it’s whether the Fed should cut more aggressively than by 25 basis points,” Ronald Temple, chief market strategist for Lazard, told U.S. News.
Temple’s view is reflected in CME’s fed fund futures prices, which imply a 100% probability of a September rate cut and a more than 50-50 chance of a 50 basis point cut.
Rate reductions are expected to continue into 2025.
Despite the mounting criticism, Chairman Powell has remained steadfast in the need to maintain the central bank’s independence from politics and public opinion. “We never use our tools to support or oppose a political party, a politician or any political outcome,” Powell said following the July FOMC meeting.