President Donald Trump had a contentious relationship with the Federal Reserve in his first term, and he didn’t wait long before picking his feud back up after his second inauguration. On Thursday, Trump told an assemblage of banking leaders, policy officials and global leaders that he would force rates of interest down.
“I’ll demand that rates of interest drop immediately,” Trump reportedly said in a video appearance on the World Economic Forum in Davos, Switzerland.
Can he really do this?
The short answer is not any. The president of the U.S. doesn’t set rates of interest. Rates are set by a committee of officials on the Federal Reserve. The Fed is an independent entity on purpose — it operates on the understanding that investors and businesses draw confidence from an apolitical central bank.
Without this independence, “monetary policy can be subject to political swings,” says Gregory Daco, chief economist at EY. That is bad news because a Fed governed by political whims quite than by a longstanding commitment to keeping prices stable and the labor market healthy could steer the economy within the fallacious direction, he says.
Daco adds that while it’s comprehensible that a president would want lower rates of interest in an effort to rev up economic activity, history shows that when rates are too low, the economic end result may be as damaging as when rates are too high.
“It’s not within the interest of the economy and the well-being of Americans. That may result in an environment where monetary policy is excessively easy, which actually fuels inflation,” he says.
What can and might’t the president do to rates of interest?
Along with his rate of interest “demand” this week at Davos, Trump has also pushed policymakers to lower rates. He spent much of his first term excoriating and threatening to fireplace Jerome Powell, who he appointed because the chairman of the Federal Reserve Board of Governors in 2018. But he can’t actually do this, either.
The president isn’t allowed to fireplace a Fed chief without cause — a very important safeguard of the central bank’s independence. For his part, Powell has continuously reiterated his commitment to serving out his term as chair, which ends in 2026.
After the election, Trump said he wouldn’t attempt to remove Powell before the chairman’s term ends, however the recent bellicose tone he has struck on rates has political and economic experts alike wondering if the president will follow his pledge.
If Trump tries inserting his wishes into policymakers’ data-based deliberations, “it may very well be unsettling to markets,” in line with former Fed official Esther George. George told Yahoo Finance last fall that this kind of political bluster “would require the Fed to rise up to pressures that it might receive, whether or not they’re simply rhetoric or they’re more direct threats.”
What is the worst that might occur?
Daco notes that while the speed of inflation has slowed considerably, households are still shouldering the burden of costs which have risen by greater than 20% since 2019. “One in all the 2 key restraints on economic activity today is the proven fact that rates of interest remain elevated,” he says.
But while extraordinary Americans may be weary of seeing their bank card APRs and loan rates proceed to climb, crossing your fingers for political intervention could backfire. Lower rates could trigger an acceleration in the speed of inflation, which could prompt the Fed to reverse course and truly raise rates as an alternative.
Each the president and Congress do have the facility to not directly influence rates, nonetheless. The extent to which executive orders and laws impact inflation could prompt a policy response from the Fed.
Many economists agree that the Trump administration’s policy priorities usually tend to result in higher, not lower, rates of interest. In June, 16 Nobel Prize-winning economists signed an open letter that said, “Many Americans are concerned about inflation, which has come down remarkably fast. There may be rightly a worry that Donald Trump will reignite this inflation.”
Now that the general public knows more details about Trump’s plans and priorities, that outlook hasn’t modified. “The policy mix usually that’s been proposed by the administration can be inflationary,” Daco says.
Trump’s push to implement tariffs and his efforts to halt immigration and deport thousands and thousands of immigrants currently within the labor force are each inflationary. The brewing fight in Congress over extending or adding to tax cuts could also drive inflation higher, he adds.
Wall Street has almost entirely written off the prospect of a rate cut on the Fed’s next meeting at the tip of this month, expecting officials to maintain the benchmark fed funds rate at a spread of 4.25% to 4.5%. Currently, markets expect only one or two quarter-percentage-point cuts in 2025. And a few market observers have suggested that the Fed won’t lower rates in any respect in 2025.
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