Will President-elect Donald Trump rein in the Federal Reserve? While there is the belief that the incoming administration may want a more significant say in monetary policy decision-making, the central bank’s chief, Jerome Powell, is not concerned that a second Trump term will involve diminishing or eliminating the Fed’s independence. The first meeting between Trump and Powell next year will undoubtedly be popcorn entertainment.
Jerome Powell and Trumponomics
Fed Chair Jerome Powell sat down for a half-hour interview with CNBC host Andrew Ross Sorkin during The New York Times’ annual DealBook Summit on December 5. The wide-ranging interview touched upon Fed independence, another Trump presidency, the “vibecession,” Bitcoin and gold, and Powell’s ability to play the guitar and repeat words backward out loud in real-time.
The headline coming out of this discussion was that Powell is not losing sleep at night worrying that the world’s most powerful institution will lose its independence under Trump. He shrugged off Trump's assertion that presidents should have a say in monetary policy and dismissed incoming Treasury Secretary Scott Bessent's opinion that the president-elect should install a "shadow chair" to undermine the incumbent.
The Fed chief alluded to various safeguards in congressional legislation preventing political influences. "What does independent mean? It means we can make our decisions without them being reversed," Powell said. "That gives us the ability to make these decisions for the benefit of all Americans at all times, not for any particular political party or political outcome. We’re supposed to achieve maximum employment and price stability for the benefit of all Americans and keep it out of the politics completely.”
Ultimately, according to Powell, the Fed’s independence is “the law of the land.”
Despite many instances of his predecessors facing pressure from the White House not to raise interest rates ahead of elections or to employ a cutting cycle, Powell admitted that he has not experienced this under either Trump or President Joe Biden. “The president said the same things to me privately as he said publicly. I said the same things privately to the president as I said publicly,” he stated.
Powell was quiet about what the rate-setting Federal Open Market Committee (FOMC) would decide at the next two-day policy meeting later this month, though he touted the economy's strength and how it is "the envy of other large economies around the world." This, he noted, can afford the institution the luxury of considering future rate moves.
According to the CME FedWatch Tool, investors have overwhelmingly expected a quarter-point interest rate cut, lowering the benchmark federal funds rate to a range of 4.25% and 4.5%. This would represent the third consecutive rate reduction since the central bank launched its new easing cycle with a super-sized 50-basis-point rate cut in September.
His colleagues have suggested that the Fed will continue to implement rate cuts, though some have discussed when the monetary authorities should slow the pace after touching a neutral policy (interest rates that neither stimulate nor hinder economic growth prospects).
"Along this baseline path, it seems important to maintain policy optionality, and the time may be approaching to consider slowing the pace of interest rate reductions, or pausing to carefully assess the current economic environment, incoming information, and evolving outlook," said St. Louis Fed President Alberto Musalem at a recent Bloomberg monetary policy conference.
The September Summary of Economic Projections suggested that the Fed anticipates the median policy rate will decline to 3.4% in 2025 and 2.9% in 2026. But this is subject to change as the path toward the 2% inflation target remains bumpy.
Fed Independence
Powell claims neither Trump nor Biden has influenced him to raise or cut interest rates. However, the timing of policy decisions does raise some eyebrows. In 2019, the Fed unnecessarily cut interest rates three times after Trump complained repeatedly on social media. In late 2023, Powell flip-flopped on his interest rate position. He claimed in one week that the central bank was not entertaining reducing the FFR. A week later, Powell announced that the Fed was getting prepared to lower interest rates. How did this happen? Biden said in remarks at a rally that the economy was doing well and that the Fed did not need to hike rates.
Of course, as Liberty Nation News has reported, the Federal Reserve System possesses a long history of being strongarmed by the sitting president. One story was even shared by Sorkin during the DealBook Summit, featuring President Ronald Reagan, Chief of Staff James Baker, and Fed Chair Paul Volcker. In Volcker’s memoir, he wrote about meeting Reagan and Baker, and the president was silent, but Baker informed him that Reagan did not want the Fed to raise rates before the 1984 election.
“I was stunned,” Volcker wrote in his memoir. “I later surmised that the library location had been chosen because, unlike the Oval Office, it probably lacked a taping system.”
The Fed has repeatedly caved to political pressure, from Marriner Eccles under President Franklin Delano Roosevelt to Arthur Burns under President Richard Nixon. While the central bank’s independence is the law of the land, the unwritten rules inside the corridors of the Eccles Building indicate that the Fed needs to examine the political calendar before policy actions.
A Political Institution?
Jerome Powell has iterated that the Federal Reserve is a diverse entity filled with many voices. However, the Fed might not be as intellectually diverse. Data show that the central bank employees overwhelmingly donate to the Democratic Party, meaning they might be more beholden to producing reports and acting on policy based on what is best for the donkeys. Its defenders can shriek and scream about Fed independence, but its current makeup and past signal it is far from a neutral group of economists and monetary policymakers.
