President Trump had a message last week for the Federal Reserve, while at the Annual World Economic Forum in Davos, Switzerland: Plan “demand that interest rates immediately fall.”
Mr. Trump may be in disappointment. The Federal Reserve was expected widely to maintain its Stable reference rate When he announced his last interest rate decision at 2 PM, Eastern time. Economists are not pencil in a 2025 reduction until at least May, according to economists surveyed by Factset of the Financial Data Service.
The president of the Federal Reserve, Jerome Powell, has firmly defended the independence of the Central Bank. More recently, he stressed in an event of the New York Times in December that isolating the Fed of political influence is “for the benefit of all Americans”, which allows him to make decisions based on economic data instead of at the request of officials elected. The independence of the Federal Reserve allows you to follow your double mandate, to keep inflation and the labor market in full employment, without political pressure, economists agree.
“We know that monetary policy must promulgate with a democratic mandate that rises, with a daily elimination of politics,” said Brett House, economics professor at Columbia Business School, to CBS Moneywatch. “It is possible that interest rates must be high, but it can be inconvenient for political interests, and [the central bank] It is possible that you should quickly move to lower rates “in case of an economic recession.
While the Fed is an independent agency, it is responsible to Congress and the public, with its president and other officials who testify before Congress regularly. The Congress also established its double mandate, as well as its staggered appointments structure for Fed officials, designed to make the agency less vulnerable to pressures “that could lead to undesirable results”, ” according To the Fed.
What happens when a central bank is not independent?
These “undesirable results” can be seen in the nations where central bankers are more vulnerable to political influence, says economists.
This is because interest rates remain the most powerful weapon that a central bank can exert against increasing inflation, a tool to which the Federal Reserve resorted in 2022 to tame the most popular inflation of the United States in 40 years. But elected officials sometimes decide that higher indebtedness costs are politically inconvenient, because they make it more expensive for companies to expand or that consumers make purchases.
In cases where a central bank is not independent, officials may succeed in pressing a central bank to maintain a lid of the rates.
Experts point to Türkiye as an example of what can happen when political interests dictate the monetary policies of a central bank. Since 2010, its central bank has been increasingly pressured by President Erdogan to maintain his low interest rates, even when inflation increased during pandemic, according to the non -partisan center for the investigation of economic policies.
Instead of hiking rates, since Turkey’s inflation rate exceeded 80% in October 2022 annually, the Central Bank of the Nation reduced its reference rate several times in 2022 and 2023 (while the bank reversed the Course and increased rates in mid -2023, inflation there has proven difficult to domesticate, and prices increase by 44% in December 2024.
In comparison, the highest United States inflation rate during the period after the pandemic was in June 2022, when inflation reached 9.1% annually in June 2022. Recorporation of the increases in the rates of the rates of the Fed, inflation has cooled since then, deflation, 2.9% per year last month.
“Fed has done really well: they have raised rates enough to try to slowly expel market inflation,” said Erasmus Kersting, professor of economics at the University of Villanova. The Fed has “done all that while avoiding a recession, that is a delicate needle to thread.”
Could Mr. Trump influence the Fed?
The questions about Mr. Trump’s ability to influence the Federal Reserve or shake their leadership are intensifying in the midst of the president’s statements about his desire for lower interest rates. During his 2024 election campaign, Trump had insisted that, as president, he should have a “say” in the Fed’s interest rate policies.
“I think, in my case, I earned a lot of money, I had a lot of success, and I think I have a better instinct that, in many cases, people who would be in the Federal Reserve or the President,” Trump said in August.
For his part, Powell said last year that he I would not give up Even if Mr. Trump is asked to do so, adding that according to the law, presidents cannot shoot or degrade the Powell’s term as president of the FED ends on May 15, 2026.
However, Mr. Trump recently fired several government officials so that critics say they violate the law, such as the dismissal of their administration of more than a dozen Federal General Inspectors on Friday. The Federal Law requires that the White House give Congress a full month of warning and specific details of the case before dismissing a federal inspector.
Eliminating Powell would not necessarily change the Fed monetary policy decisions, since the rates are established by the Federal Open Market Committee of 12 people (FOMC). Seven members are from the Board of Governors of the Fed; Four of the 11 presidents of the Bank of the Reserve are assigned, each of which serves in terms of one year in a rotating form; And a member of the FOMC is the president of the Bank of the Federal Reserve of New York.
Interfering with the Fed could have consequences, both legally and for the stock market, experts said.
“If any president tries to say goodbye to the president of the Federal Reserve without cause to do the work that were appointed and confirmed that they did, I hope there are rapid legal challenges,” Tim Stretton said in the Government’s Supervision Project, a non -partisan. Government danger. “I suspect that the market would also react negatively. To markets such as stability, and this unprecedented level of interference in the Federal Reserve would be anything but stable.”
When asked what advice he would give Mr. Trump about dealing with the Fed, said the house of Columbia’s Business School: “Stop speaking.”
He added: “Let the Fed do its business consisting with its mandate, and it is more likely to decrease interest rates.”
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