Could a Trump administration challenge the Fed’s independence?

As Americans await the outcome of the 2024 presidential election, the potential economic impact of a Trump administration on Federal Reserve policy has emerged as a key question for investors.

 While nearly all analysts agree that Trump’s proposed tariff measures are likely to drive inflation higher, concerns also surround the potential influence he could wield over Federal Reserve policy and the risks he might pose to the central bank’s independence.

Trump’s inflationary policies could prompt a hawkish Fed response

Trump has pledged to reintroduce tariffs on imports, proposing a 60% tariff on Chinese products and a 10% tariff on imports from other countries. 

Combined with potential tax cuts and stricter immigration policies, economists widely view these proposals as inflationary, and likely to intensify price pressures within the US economy.

A recent analysis by JP Morgan suggests that these tariffs, along with tax cuts, could push inflation up by an estimated 2.5 percentage points. Should inflation rise significantly, the Fed, which is mandated to ensure price stability, might have little choice but to respond with tighter monetary policy. 

The bank’s traditional tool for managing inflation – a hike in interest rates – would probably become necessary, or at the very least, anticipated rate cuts for 2025 could be put on hold.

Goldman Sachs’ Chief Economist Jan Hatzius projects that Trump’s proposed policies could push core inflation above 3% in 2025, exceeding the Fed’s 2% target. 

This, Hatzius noted: “might well be a reason to delay cuts that might otherwise occur more quickly”. 

If Trump’s economic policies were to accelerate inflation, the Fed’s ability to ease monetary conditions would be constrained, potentially complicating Trump’s own growth agenda.

Could Trump undermine the Fed’s independence?

The independence of the Federal Reserve from political influence is widely considered a cornerstone of a stable and credible monetary policy framework. This autonomy allows the Fed to make decisions based on economic data and the central bank’s dual mandate – promoting maximum employment and stable prices – rather than political pressures. 

An independent Fed is essential to maintaining control over inflation, upholding public trust in the currency, and fostering sustainable economic growth.

While the US president does not have direct control over Fed policy decisions, there are indirect ways a president can exert influence. For instance, a president’s public statements, criticisms, or even threats regarding the Fed’s decisions can create market noise and potentially sway public opinion. 

This pressure could undermine public confidence in the Fed’s independence if it appears the institution is responding to political rather than economic imperatives.

During his previous term, Trump frequently criticised the Fed and its Chair Jerome Powell, whom he appointed in 2018. Trump often urged the Fed to adopt a more dovish stance, publicly pressing for rate cuts and even calling for negative interest rates when the federal funds rate was near zero. 

Data analysis of Trump’s Twitter feed reveals over 100 tweets targeting the Fed during his first three years as President, many demanding lower rates or critiquing Powell’s hawkish stance. 

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“During Trump’s term in the White House, he routinely pressured the Fed and his hand-picked Fed chair, Jerome Powell, to lower interest rates, foreshadowing how he might approach the Fed in a second term,” wrote Sarah A. Binder, senior fellow at Brookings institution. 

The expert believes that Trump will “undoubtedly” pressure the Federal Reserve if he is elected. 

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Trump’s potential influence on future Fed leadership

If re-elected, Trump has indicated that he would not support reappointing Powell for a second term as Fed Chair when his current term expires in May 2026. 

However, it is uncertain if Trump would seek to oust Powell from the position only a year before his term ends.

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Stephen Brown, an economist at Capital Economics, suggested that Trump may aim to reshape the Fed through future appointments rather than attempt to remove Powell prematurely. 

“It is not clear that Donald Trump, if elected, would gain much from trying to force Fed Chair Jerome Powell out of the role only a year before his term expires anyway. Trump might instead focus his efforts on securing Senate approval for future nominations to the Fed Board of Governors,” Brown explained.