Fed officials have strongly defended their separation from politics, but the presidential election has thrown the bank into crisis due to partisan bickering.
Fed officials set policy independently of the White House, so while the president can ask for lower interest rates, he cannot force central bank officials to cut borrowing costs. Although Congress oversees the Fed, it does not have the power to directly influence interest rate decisions.
There is a reason for that separation. Incumbent politicians generally want low interest rates, which help make borrowing cheaper and spur economic growth. However, the Fed uses high interest rates to moderate and stabilize inflation. And if politicians force interest rates to remain low and constantly disrupt the economy, price increases can spiral out of control.
Given the Fed's independence, presidents have largely avoided talking about central bank policy since the early 1990s. He said pressure on officials to lower interest rates is unlikely to be effective, and could backfire by encouraging policymakers to keep rates the same for long periods of time to prove independence from the White House. Yes, the government reasoned.
But Donald J. Trump overturned that convention when he was president. He called Fed officials “crazy” and implied that Fed Chairman Jerome H. Powell was the “enemy” of the United States for keeping interest rates too high. And while campaigning for the Republican nomination, he has already talked about the Fed in political terms, suggesting that lowering rates by November would be a ploy to help President Biden win a second term. There is.
Some of Mr. Trump's allies outside the campaign have suggested that the Fed's regulatory functions be subject to White House review. Mr. Trump also said he intended to bring all “independent agencies” under White House control, but he and his allies did not specifically mention dictating the Fed's decisions on interest rates.
Gabriel Chodorow Reich, an economics professor at Harvard University, said it seems “unrealistic” for the White House to be directly involved in Fed policy. But he could chip away at the central bank's independence in more subtle ways, both through who his administration nominates to key Fed positions (Powell's term expires in May 2026) and through a long-running pressure campaign. He pointed out that there is a gender.
“While this may not lead to an immediate catastrophe, over time the Fed's independence may decline, making it more difficult for the Fed to make difficult decisions, such as raising interest rates, that would slow the economy,” Chodorow said. “There is,” he said. Reich said.
And in the short term, given the reality that the Fed is likely to remain on the political agenda in the run-up to elections, some economists believe that even if inflation has cooled sufficiently, central bank officials will I have doubts about whether the central bank will be able to start lowering interest rates with confidence at its November meeting. That's what they do. Taking action just before the election could draw even more attention to the Fed.
But some economists believe officials will still cut rates later this year if warranted, regardless of the political backlash that may result.
“My guess is they want to get out of the middle of an election,” said Donald Cohn, a former Fed vice chairman who now works at the Brookings Institution. are kept equal. “All other things are not equal. Incoming data will be the main factor in determining the timing of rate cuts.”