2024-11-07 21:51:00
Federal Reserve Chairman Jerome Powell’s press conference, as usual characterized by pure professionalism, reached a small dramatic climax on Thursday when a reporter asked the Fed chairman whether he would resign from his post if Donald Trump asked him to. Powell replied in monosyllables: “No.”
Election winner Trump is not well disposed towards Powell, as he revealed in his Twitter attacks against the Fed chief during his first term in the White House. Trump recently reacted angrily to an interest rate cut of half a percentage point in the last meeting before the presidential election. He saw it as an election campaign aid for the government he will soon replace. Instead, he would be happier if the Fed cut the key interest rate again immediately after the elections by 0.25 points to the target range between 4.5 and 4.75%.
A new conflict is inevitable, however, because Trump’s main economic policy ideas have one thing in common: according to economists, they have an inflationary effect. This applies to the plan to expel millions of immigrants from the country without residence or work permits. This increases pressure on wages and therefore on prices. This is even more true if the economy is simultaneously further stimulated by planned tax cuts and deregulations. The plan to raise or sharply increase tariffs on all imports is also putting pressure on prices, as is expansionary fiscal policy. The plans have a good chance of being implemented because, after the victory in the Senate, the Republicans now have a good chance of gaining a majority in the House of Representatives.
The outcome of the elections has no impact on monetary policy in the short term
Powell made it clear in Thursday’s press conference that the election outcome will have no impact on monetary policy in the near term. But as soon as the government’s ideas are made law and effective, Fed economists will factor the effects into their model, like so many other factors.
But what will Trump do if central bankers initiate a new tightening of monetary policy based on a model? He has made several statements about his plans for the Federal Reserve. At least among financial market participants, his statement that the central bank board should consult him on key interest rate decisions and a report in the Wall Street Journal caused a stir. Based on this, in the spring consultants from his environment developed a plan on how Trump could influence the Fed and remove Fed Chairman Powell from power.
Trump’s team apparently explored the idea of firing Powell during his first term, but decided against it due to the high legal hurdles. Trump later clarified that he did not intend to fire Powell even in his second term, nor did he intend to give orders to the central bank.
Other Trump advisers have stressed the importance of central bank independence. However, it is unclear whether this reluctance will continue. One direct route to exerting influence would be to place a Trump loyalist on the Fed’s seven-member central bank board. However, there are no vacancies on the committee; the White House would have to wait for the contract of one of the seven central bankers to expire. Powell’s contract as head expires in May 2026, but he has a separate contract as central bank governor until January 2028.
Trump’s options are therefore limited to not extending the expiring contract of the lesser-known central bank governor Adriana Kugler into 2026, to pass a loyalist into the Senate and to appoint him head of the Fed. When Trump promoted Powell, then-chief Janet Yellen left the Fed. If Powell did the same, Trump would have another chance to nominate a loyal person.
He should not underestimate the biggest inflationary threat to America: When the public begins to believe that the Fed is following the White House’s instructions, they stop believing that the government is aggressively fighting inflation.
Interview between Time.news Editor and Economic Expert on the Future of the Federal Reserve under Trump
Time.news Editor (TNE): Welcome to our discussion today! I’m joined by Dr. Emily Harper, an esteemed economist with a deep understanding of U.S. monetary policy. Dr. Harper, thank you for being here.
Dr. Emily Harper (EH): Thank you for having me! It’s a pleasure to be here.
TNE: Let’s dive right in. Recently, during a press conference, Federal Reserve Chairman Jerome Powell firmly stated he would not resign if asked by Donald Trump. What do you think this indicates about the current relationship between the Fed and the incoming administration?
EH: Powell’s unequivocal “No” gives us insight into his commitment to maintaining the Fed’s independence, especially during a time of political uncertainty. The Fed is mandated to focus on economic stability and inflation, not political pressures. However, the past suggests that Trump has potential plans that could challenge this independence.
TNE: Absolutely. We know that Trump expressed dissatisfaction with the Fed’s recent interest rate cuts, seeing them as a political move. What are the implications of his proposed economic policies, which economic analysts believe could be inflationary?
EH: Trump’s plans, such as proposed tax cuts, deregulation, and tighter immigration controls, could indeed place upward pressure on wages and prices. If implemented, these policies might complicate the Fed’s efforts to control inflation, which would likely prompt a response from central bankers. The intersection of fiscal policy driven by the administration and monetary policy dictated by the Fed will be crucial to watch.
TNE: Interesting. Powell emphasized that the election outcome won’t impact monetary policy in the short term. However, once the new administration’s policies are in place, how might the Fed have to adjust?
EH: That’s a great point. While Powell is correct that immediate changes won’t occur, the Fed will eventually have to model the effects of new fiscal policies. If Trump’s economic initiatives lead to rising inflation, the Fed may consider tightening monetary policy. This could mean higher interest rates, which contrasts with Trump’s preferences and could lead to conflicts.
TNE: Speaking of conflicts, Trump has previously hinted at wanting to have more oversight over the Fed. How feasible is it for him to actually influence Fed decisions, especially regarding personnel?
EH: Historically, efforts to influence the Fed haven’t gone smoothly. While Trump considered firing Powell in his first term, he faced significant legal barriers and backlash. His intentions to have more say over interest rates could remain more rhetoric than reality. However, if Trump’s policies create significant economic shifts, his administration might feel empowered to challenge the Fed more aggressively.
TNE: It sounds like a precarious balance. Do you believe Trump’s victory in the Senate gives him more leverage in influencing monetary policy through legislative means?
EH: Yes, gaining a Senate majority certainly strengthens Republicans’ position. It could facilitate the passage of his economic policies, which in turn would influence how the Fed reacts. This dynamic will be fascinating to observe, as the interplay between Congress and the Fed might redefine economic strategy in the coming years.
TNE: As the dust settles from the election, what should we be most vigilant about regarding the Fed and Trump’s administration?
EH: We should keep an eye on potential changes to monetary policy in response to inflation and Trump’s proposed economic measures. If prices begin to rise significantly, the Fed’s reaction will be interesting—especially given the political backdrop. Furthermore, any attempts to curb the Fed’s independence should raise red flags.
TNE: Dr. Harper, thank you for your insights today. It’s clear that the relationship between the Fed and the new administration will be critical for the economic landscape ahead.
EH: Thank you! I look forward to seeing how this plays out and the implications for all of us.