President-elect Donald Trump plans to retake the White House with bold promises, including low interest rates.
US households have disappointed in two years high borrowing costs. However, the president does not have the right to reduce it mortgage ratescredit card APRs or business loan rates Interest rates are derived from a combination of economic factors, including the Federal Reserve's monetary policy.
The Fed, the nation's central bank, began gradually lowering its benchmark interest rate over the fall.The Fed's top decision-making body meets again this week, and another quarter percent cut is on the agenda.
While Trump will have the power to appoint a new Fed chair in 2026, he does not have the ability to set monetary policy or directly change the federal funds rate.
There is a long history of presidents trying to interfere with the central bank's autonomy.Trump during his first presidency threatened to fire Fed Chairman Jerome Powell after the Fed started raising interest rates.The president-elect recently said he would not try to oust Powell until the Fed chair's term ends in 2026.
Here's what Trump can and can't do about interest rates and the Fed.
Who sets interest rates?
The Federal Reserve sets the federal funds rate, the benchmark rate that banks pay to borrow money. This target rate range indirectly affects the short-term interest rates that banks and lenders will later charge customers on everything from credit cards to home and auto loans.
The Fed lowers and raises its benchmark interest rate to keep prices relatively stable (with ideal inflation of 2% per year) and unemployment low. Peter C. Earl, Senior economist at the American Institute for Economic Research.
To understand how this works in practice, think back to the early days of the COVID-19 pandemic. The Fed cut interest rates to zerohoping to encourage spending and investment when people and businesses would otherwise hesitate. Then, when the economy rebounded two years later, The Fed has raised interest rates to combat rapid inflation.
What is the relationship between the Federation and the Government?
Federal Reserve was created by Congress in 1913 With the Federal Reserve Act, Congress can amend the act to change the way the Fed operates.
The president's primary relationship with the Fed is through his power to appoint the Fed chairman and other board members are so that no one president has the power to completely reshape the Fed, said George Washington University political science professor Sarah Binder.
In theory, Trump could push changes to the Federal Reserve Act through the Republican-controlled Congress, but Binder said any changes to the rules governing the Fed would require a bipartisan coalition of 60 votes to pass in the Senate.
What can the president do? | What the president can't do |
Appoint a new Fed chair in 2026 (and appoint Fed board chair members, usually when their terms end) | Vacate a Fed chair for simple disagreements Fed chairs can only be removed for "cause," such as misconduct or infractions. |
Express concern about monetary policy by publicly criticizing the Fed's actions. | Set interest rates directly for a country or banking institution. |
What power does Trump have over the Federal Reserve?
In 2018, during his first administration, Trump was appointed Jerome Powell, the current chairman of the Fed. Two years later, Trump called him an “enemyPowell's term ends in 2026, and the president is unlikely to fire Powell before then. Asked in early November whether the president could remove the Fed chairman or other Fed governors, Powell said: the law."
According to Earle, members of the Federal Reserve Board can only be removed for "cause," meaning proven misconduct or incapacity due to illness. Simple disagreements over policy or presidential frustration over interest rates are not sufficient grounds for removal said Earl.
Presidents have another, if unofficial, power over the Fed: the bully chair.Some presidents have been known to rail against the Fed when the economy is bad, pressuring them for one action or another did in his first term, threatening to fire the Fed chair when the economy nearly collapsed in March 2020. Experts agree that Trump is likely to make similar comments again.
"I don't think anyone expects presidents, especially in today's era, to completely tie their hands behind their backs," Binder said.
Is the Fed really nonpartisan and independent?
In theory, the Fed is independent, but in practice it's not always that way. According to Earle, it's almost impossible for an organization as important as the Fed to be completely above politics.
The Fed has several structures that insulate it from outside influence. for example, long terms for board members, staggered appointment periods, and causality projections all work to allow the Fed some autonomy and protect it from the whims of political leaders.
But ultimately, the Fed operates in the middle of the political system. "It can't be hermetically sealed," Binder said.
How will Trump's policies affect future rate cuts?
Experts say it is unlikely that Trump's broader economic policies will lead to faster or deeper rate cuts. In fact, they may have the opposite effect.
Trump's proposals for tariffs on foreign imports are likely to trigger higher inflation, which could then prompt the Fed to raise interest rates again, as it often does to fight inflation, it said. Dean BakerSenior Economist of the Center for Economic Policy and Research.
But experts say Trump's biggest impact may be the sheer uncertainty he inspires, which could rattle financial markets Trump's threats, whether he will (or can) follow through, just add volatility to the mix.
Related articles about the Fed
Source link