President Donald Trump resumed his contentious relationship with the Federal Reserve shortly after his second inauguration. During a recent address at the World Economic Forum in Davos, Switzerland, he declared that he intends to push for a reduction in interest rates.
“I’ll demand that interest rates drop immediately,” Trump stated in a video appearance.
Is this feasible?
The straightforward answer is no. The U.S. president does not have the authority to set interest rates, as these are determined by a committee within the Federal Reserve. The Fed operates as an independent institution, designed to maintain investor and business confidence through its apolitical nature.
According to Gregory Daco, chief economist at EY, removing the Fed’s independence could lead to monetary policy being influenced by political factors rather than a commitment to stable prices and a healthy labor market. This could ultimately misdirect the economy.
Daco emphasizes that while it is understandable for a president to desire lower interest rates to stimulate economic activity, history indicates that excessively low rates can lead to adverse economic effects, just as high rates can.
“It’s not beneficial for the economy or the well-being of Americans. This situation could create a landscape of overly lenient monetary policy, which may actually exacerbate inflation,” he warned.
What options does the president have regarding interest rates?
In addition to his recent demand for lower rates, Trump has urged policymakers to consider rate cuts. Throughout his first term, he was vocal about his dissatisfaction with Jerome Powell, the Fed Chairman he appointed in 2018. However, he lacks the authority to dismiss Powell without just cause, a protection designed to preserve the Fed’s independence. Powell has stated his intention to complete his term, which lasts until 2026.
Post-election, Trump indicated that he would not attempt to remove Powell, but his recent aggressive stance on interest rates raises questions about his commitment to that promise. Should Trump attempt to influence the Fed’s data-driven decisions, it could create instability in the markets. Former Fed official Esther George expressed that such political pressure could challenge the Fed to withstand both rhetorical and direct influences.
What are the potential consequences?
Daco notes that although inflation rates have decreased, households are still facing a cumulative price increase of over 20% since 2019. He points out that elevated interest rates remain a significant barrier to economic activity.
While many Americans may be frustrated by rising credit card and loan rates, relying on political intervention for relief might be counterproductive. An attempt to lower rates could inadvertently increase inflation, leading the Fed to raise rates instead.
Nonetheless, both the president and Congress can indirectly affect interest rates. Executive orders and legislative actions that influence inflation could elicit a response from the Fed.
Many economists suggest that the policies proposed under the Trump administration are more likely to result in higher interest rates. A letter signed by 16 Nobel Prize-winning economists warned that concerns over inflation, previously declining, might be reignited by Trump’s policies.
As the public becomes more aware of Trump’s priorities, the consensus remains that the proposed policy mix is likely inflationary. Trump’s initiatives, including tariffs and immigration restrictions, are seen as contributing factors to inflation. Ongoing discussions in Congress about tax cuts could further elevate inflation concerns.
Market analysts do not anticipate a rate cut in the upcoming Federal Reserve meeting, expecting rates to remain in the 4.25% to 4.5% range. Current projections suggest that there may only be one or two incremental cuts in 2025, with some analysts positing that rates may not be lowered at all that year.
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