During his presidency, Donald Trump repeatedly complained that the Federal Reserve was doing things that he believed were bad for the economy—complaints the Fed ignored. If Trump wins a second term, he may work to make sure the Fed has to listen to him.
Both Trump and his running mate, Ohio Sen. J.D. Vance, argue that the President should have more power over one of the Fed’s most powerful tools: setting interest rates.
“I feel that the President should have at least say in there, yeah, I feel that strongly,” Trump said last week at a news conference in Mar-a-Lago. “I think I have a better instinct than, in many cases, people that would be on the Federal Reserve, or the chairman.”
It’s a move that would be a sea change for the United States, with ripple effects across the globe, as the Fed’s independence from politics is widely viewed as central to its ability to effectively manage U.S. monetary policy.
Multiple economists who spoke to TIME raised concerns that Trump’s proposal would lead to sitting Presidents pushing the Fed to enact policies that may be advantageous during election years but could have dangerous consequences for the long-term health of the economy.
“It sets the system up for abuse,” says Robert Barbara, the director of the Center for Financial Economics at Johns Hopkins University.
For decades, Presidents’ influence over the Fed has largely been confined to appointing its chair and board of governors. It is not uncommon to see Federal Reserve chairs be reappointed by Presidents from different political parties. The current chair of the Federal Reserve, Jerome Powell, was initially appointed by Donald Trump before being reappointed by President Joe Biden.
Short term vs. long term
Economists say that politicizing the Federal Reserve would be harmful regardless of which party is in charge, because of the unique tradeoffs the Fed faces in meeting its dual mandate of pursuing maximum employment and managing inflation.
Keeping inflation down, in particular, can be tricky. Sometimes, it can lead to the Fed making decisions that increase the risk of recession in the short run in order to get inflation under control in the long run.
Throughout most of the Biden era, the Federal Reserve has been battling the highest inflation in over 40 years. Its main tool for trying to lower inflation has been increasing the Federal Funds Rate, the interest rate banks are required to charge each other for overnight loans. When the Federal Funds Rate increases, moving money between banks becomes more costly. This leads to fewer dollars circulating throughout the economy, which usually helps lower inflation but also increases the risk of a recession.
Ryan Chahrour, a professor of economics and international studies at Cornell University, says politicians typically operate under “short-term incentives” of preferring economic growth, especially just ahead of an election. That usually means advocating for keeping interest rates low.
“This would often lead to an inflationary bias, which is a tendency for the central bank to allow too much [economic growth] in the short term and cause inflation to be higher,” Chahrour says.
How we got here
The Federal Reserve has not always been apolitical. In the 1970s, the institution struggled to keep the short-term desires of politicians in check, leading to high inflation, peaking at 13.5% in 1980.
President Jimmy Carter made taming inflation a priority of his administration. Once elected in 1976, Carter sought out a new Federal Reserve chair who would be willing to fight inflation even if it meant risking a severe recession. He settled on appointing the then-president of the state Federal Reserve Bank of New York, Paul Volcker.
Volcker worked with the Fed to set interest rates that were unusually high for that time. The economy went through two recessions within a span of two years. When Volker’s tenure ended in 1987, inflation had moderated to 3.7%. “The most independent of central bankers was Paul Volcker,” says Barbara. “He slayed the great inflation by ignoring the scrutiny of politics.”
Volker helped establish the norm that the Federal Reserve should function largely independent from politics, according to the economists who spoke with TIME.
What does Trump want to do?
Both Trump and Vance have suggested recently that they might do a better job at setting the Federal Funds Rate than the experts at the Federal Reserve.
“You have so many bureaucrats making so many important decisions,” Vance said in an interview with CNN that aired Sunday. “If the American people don’t like our interest rate policy, they should elect somebody different to change that policy. Nothing should be above democratic debate in this country.”
Though Trump named Powell to take over as chairman of the Federal Reserve in 2017, the former President repeatedly criticized Powell and pressured him to lower interest rates during his presidency. “When Trump was in office and seeking re-election, he was upset that Jerome Powell kept interest rates too high, and when Trump is out of office, he’s upset that Powell keeps interest rates too low,” says Chahrour.
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In other words, Trump advocated for a monetary policy that had a higher likelihood of increasing inflation while he was in power, but also could boost the economy in the short term, potentially improving his chances of winning an election. When he was out of power, he advocated for a tighter policy that would likely decrease inflation but also dampen the economy and make the Biden Administration appear worse in the short term. “It seems to be that Trump is actually responding to these very well understood incentives,” says Chahrour.
Vice President Kamala Harris, Trump’s opponent in the 2024 election, said she disagrees with his stance. “The Fed is an independent entity and as President I would never interfere in the decisions that the Fed makes,” Harris told reporters on Saturday in Phoenix, Arizona.