During his presidency, Donald Trump frequently criticized the Federal Reserve’s actions, claiming they were detrimental to the economy—criticisms that the Fed often dismissed. Should Trump secure a second term, he might actively ensure the Fed aligns with his vision.
Both Trump and his running mate, Ohio Sen. J.D. Vance, advocate for increased presidential influence over one of the Fed’s most potent instruments: setting interest rates.
“I believe the President should have a voice, at the very least, in this, yes, I feel that strongly,” Trump stated last week . “I think I have a better instinct than, in many cases, individuals who would be on the Federal Reserve, or the chairman.”
This proposal would mark a significant change for the United States, with global repercussions, as the Fed’s political independence is widely considered crucial for its ability to effectively manage U.S. monetary policy.
Numerous economists interviewed by TIME voiced concerns that Trump’s proposal could incentivize sitting Presidents to pressure the Fed into implementing policies that might be beneficial during election years but potentially harmful to the long-term economic health.
“It creates a system ripe 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 primarily been limited to appointing its chair and board of governors. It’s not unusual for Federal Reserve chairs to 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 argue that politicizing the Federal Reserve would be detrimental regardless of the party in power, due to the unique tradeoffs the Fed faces in balancing the goals of pursuing maximum employment and managing inflation.
Keeping inflation in check, in particular, can be challenging. Occasionally, it necessitates the Fed making decisions that might cause short-term pain in order to curb inflation in the long run.
Throughout much of the Biden era, the Federal Reserve has been grappling with the highest inflation in decades. Its primary tool for attempting 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 rises, moving money between banks becomes more expensive. This typically leads to fewer dollars circulating throughout the economy, which generally helps curb inflation but also increases the risk of a recession.
Ryan Chahrour, a professor of economics and international studies at Cornell University, notes that politicians typically operate under “short-term incentives” of favoring economic growth, especially just before an election. This usually involves advocating for keeping interest rates low.
“This would frequently result in an inflationary bias, which is a tendency for the central bank to permit too much [economic growth] in the short term and cause inflation to be higher,” Chahrour says.
How we got here
The Federal Reserve hasn’t always been apolitical. In the 1970s, the institution struggled to keep the short-term desires of politicians in check, leading to high inflation, culminating in a severe recession in 1980.
President Jimmy Carter made taming inflation a top priority of his administration. After being elected in 1976, Carter sought a new Federal Reserve chair who would be willing to combat inflation even if it meant risking a severe recession. He ultimately decided to appoint the then-president of the state Federal Reserve Bank of New York, Paul Volcker.
Volcker worked with the Fed to establish unusually high interest rates for that period. The economy experienced a significant recession. When Volker’s tenure ended in 1987, inflation had significantly decreased. “The most independent of central bankers was Paul Volcker,” says Barbara. “He vanquished the great inflation by disregarding political scrutiny.”
Volker played a key role in establishing the norm that the Federal Reserve should function largely independent of politics, according to the economists who spoke with TIME.
What does Trump want to do?
Both Trump and Vance have recently suggested that they could 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 vital decisions,” Trump said on a program that aired Sunday. “If the American people don’t like our interest rate policy, they should elect someone different to change that policy. Nothing should be above democratic debate in this country.”
Although Trump named Powell to assume the chairmanship 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.
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 said in Phoenix, Arizona.