Trump vs. the Fed: The relationship between the executive branch and the Federal Reserve has always been a complex one, filled with tension and differing priorities.
In the evolving landscape of U.S. politics, the tension between former President Trump and the Federal Reserve (the Fed) is likely to intensify during his potential second term. Bloomberg columnists Sarah Binder and Mark Spindel highlight the greater political pressure the Fed may face now compared to Trump's first term. With ongoing inflation and diminishing support from Congress and the courts, the Fed's decision-making could increasingly be subject to political interference. In this context, financial markets might serve as the last line of defense for the central bank.
If you thought Trump’s pressure on the Fed during his first term was intense, the situation in a second term could be even more severe. During his first term, Trump frequently criticized the Fed, calling for interest rate cuts even amid strong economic performance and stable prices. Now, he is again demanding rate reductions just as the Fed appears poised to pause its easing measures. Even before taking office, Trump sought to undermine Michael Barr, a key Fed figure responsible for bank oversight, and questioned Chair Jerome Powell's decisions.
This intervention comes at a time when the Fed is grappling with the consequences of inflation, further amplifying the political pressure it faces. However, the Fed now has fewer defenders and protective mechanisms than before.
Fed officials aim for the institution to be seen as an independent body, free from political influence. Legally, the Fed operates with a degree of independence: the president nominates governors, who are confirmed by the Senate for 14-year terms that do not coincide with presidential elections. Crucially, the Fed does not rely on congressional appropriations; it funds itself through the buying and selling of government securities.
Yet, the Fed still depends on political support. Officials must cultivate relationships with lawmakers to prevent Congress from altering the Fed's responsibilities in response to economic downturns. Moreover, pressure from the president for interest rate cuts to stimulate the economy is difficult to resist, and presidential attacks can undermine public confidence in the Fed.
Trump’s motivations for targeting the Fed can be categorized into three main factors:
Political Capital: Trump interprets his narrow electoral victory as a repudiation of the Democratic Party and President Biden. He views the Fed as one of his primary adversaries.
Economic Context: Trump’s success was bolstered by rising inflation levels, the worst seen in decades. While the post-pandemic inflation has multiple drivers, criticisms of the Fed for waiting until 2022 to raise rates are valid. The economic and political ramifications of inflation make the Fed an easy target for Trump’s more aggressive stance.
Biden's Appointees: Biden’s administration has largely filled the Fed with its own appointees. Although Trump appointed Powell and confirmed several governors, the subsequent appointments made by Biden have shifted the balance of the Fed's leadership.
Today's Congress is more "Trumpified" than it was eight years ago. In 2017, only 11% of Republican House members were Trump supporters. Now, about two-thirds of Republican House members were elected in 2017 or later. The Senate has seen a similar transformation: only two Republican senators were elected alongside Trump in 2016, while nearly half of the current Republican Senate members took office after his first election. These Republicans generally favor deregulating banks and are poised to confirm Trump’s Fed nominees.
Economic conditions could further weaken any instinct among Republicans to defend the Fed. Historically, support for the Fed has been counter-cyclical; when the economy is performing well, lawmakers have little reason to scrutinize the Fed. Conversely, during economic downturns, criticism of the Fed is quick to emerge.
The Fed's misjudgment of inflation—as "transitory"—has made it harder for even sympathetic legislators to defend it. Fed officials acknowledge that their mission is unfinished, as inflation remains above their 2% target. Persistently high prices have heightened public frustration.
The Fed cannot rely on the Supreme Court for support. Several judicial decisions have weakened the autonomy of independent agencies, including the Fed. For instance, in 2020, the Supreme Court sided with Trump in dismissing the director of the Consumer Financial Protection Bureau, which was funded by the Fed.
This shift raises the possibility that if Trump attempts to dismiss Powell or allows Fed governors to be removed for policy mistakes or political differences, the Supreme Court may side with him. Such a decision would contradict late 19th-century legal precedents that restricted presidential dismissal powers to "inefficiency, neglect of duty, or malfeasance."
Despite these pressures, the reaction of financial markets should not be underestimated—they quickly respond to any signs of central bank policy missteps. The Fed is the only institution with the tools to control the cost of money.
The financial markets themselves—perhaps the true "shadow Fed chair"—may ultimately decide whether politicians and the public support the Fed in future confrontations with the presidency. If markets perceive that political interference is undermining the Fed’s independence, they could react swiftly, affecting everything from interest rates to investor confidence.
As Trump and the Fed navigate a potentially contentious second term, the interplay between political power, judicial authority, and market reactions will be crucial. With Congress and the courts less likely to defend the Fed against presidential attacks, the central bank’s independence hangs in the balance. Ultimately, the financial markets may emerge as the key arbiter in this complex relationship, shaping the future of monetary policy in the United States.
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