Assestment Trump Threat to FED Independence
After going a bit more in-depth into the options and possibilities of Donald Trump, I am maintaining my initial assessment that the likelihood of Trump influencing rates is very low
My arguments:
- The FED structure and independence are protected by law (The Federal Reserve Act of 1913). This means any structural change will have to be introduced with a bill, and eventually examined and voted. This is a very slow process, and Trump can only work with some congress appointees to introduce bills, he can’t do it himself.
- There are currently already bills trying to change the FED in Congress (even trying to abolish it ), however, they don’t gain any traction, and more bills introduced since 2021 have not passed yet the state of being introduced. Indicating a lack of bipartisan broad support.
- Any major amendment or change to the law requires two-thirds of both chambers to approve the amendment, and 38 out of 50 of U.S. states to ratify it. Which is highly unlikely to have such support for this.
- Only simple changes like requiring more oversight over the FED are made with a simple majority in both chambers. However, a filibuster in the Senate often blocks controversial measures ( would require 2/3 majority to overcome a filibuster)
- Trump can and will most likely apply private and public pressure on the FED, but since the FED is not accountable or dependent on anything to the executive brand, there is not much leverage he can have on any of them.
- In 2018, Trump had already put huge pressure on the Fed and Powell, even calling it an enemy. Despite this, the FED still hiked rates and lowered rates slower than Trump wished.
- Powell could actually be more careful with rate cuts going forward so there is not the perception he is being manipulated by Trump to do so (Powell was already criticized in 2019 when he lowered rates, some argued that he had succumbed to political influence)
- Trump can appoint new governors to the FED, but term end dates for governors are not equal to avoid political manipulation. During Trump only the Fed chair (2026) and 1 other governor (2026) term expires, so his chances to appoint sympathetic to his cause governors are rather low.
- Trump’s statement says he will demand lower rates because oil prices will come down due to his policies of increasing supply. However, most experts say this is highly unlikely, companies are not looking to hugely increase supply, are more cash flow conscious currently, lower prices make it less economically feasible for them to do so, and global demand and supply also plays a huge role, and
- There is already 1 historical precedent (Nixon/Burns 1971) where the FED succumbed to the president’s wishes, it ended up with a horrible inflationary period. This will always IMO come back as a reminder of the importance of keeping the independence and being apolitical.