Multiple times during his campaign, U.S. President-elect Donald Trump expressed his desire for more presidential say over monetary policy, and that the Fed should wait until after the election to cut interest rates. Of course, the Fed embarked on a rate cutting cycle in September, but now that a second Trump administration is imminent, investors may well wonder whether he may indeed push to have more influence on Fed policy.
A challenge to Fed independence would have significant consequences and could set a precedent for future administrations. However, we believe that there are several guardrails in place that could considerably limit the extent of presidential influence over monetary policy decisions.
First, Fed Chair Jay Powell’s term extends to May 2026 and Trump has stated he would let him serve out his term, though adding “especially if I thought he was doing the right thing”.1 In reality, the legal bar for removing a Fed chair is very high.2 And, when asked if he would resign if Trump asked him to during the press conference following the November 7 Fed meeting, Powell replied with a terse “no”. Second, the Fed’s monetary policymaking body — the Federal Open Market Committee (FOMC) — is about more than just the Fed chair. For instance, the terms of the other members of the Fed board are staggered, with terms of only one of the other six members’ terms (other than the chair) expiring during Trump’s second term. This number could increase, for instance, if the two vice chairs are not renominated for their roles and decide not to serve out their remaining board terms.
In addition, the FOMC is composed of more than just the Fed board members. Five of the 12 voting members of the FOMC are regional reserve bank presidents, chosen by their local boards of business leaders and not subject to presidential nomination nor Senate confirmation. And one of the reserve bank presidents (the head of the New York Fed) customarily serves as vice chair of the FOMC.
Should Trump nominate a more pliable chair in 2026, the Senate would still need to confirm that person. Trump’s track record in getting non-conventional Fed nominees confirmed by the Senate is not very good. His nomination of Judy Shelton to become a member of the Federal Reserve Board was blocked by the Senate, while other publicized potential nominees for Fed governor, such as Stephen Moore and Herman Cain, did not make it to the confirmation process. One could argue that Trump’s sway over the Senate will likely be stronger now than it was during his first term, but we should also keep in mind that, even within the context of a more agreeable Senate, the bar for Senate confirmation of a Fed chair is much higher than that for member of the board.
What does this mean?
Overt presidential interference in monetary policy would be highly controversial and could lead to significant market volatility. So while Trump could make an attempt at challenging Fed independence, causing what could turn out to be substantial financial market turmoil would run counter to Trump’s view of the stock market as a barometer of success. Trump could certainly continue to be a vocal critic of Fed action, similar to his first term. However, we believe the guardrails from the FOMC structure, and a reticence to add unnecessary market volatility, will limit his ability and willingness to directly interfere with the conduct of monetary policy.
1. Interview with Bloomberg Businessweek. June 25, 2024
2. There have been some contentious presidential and Fed chair relationships in the past. For example, President Ronald Reagan and former Fed Chair Paul Volcker came into conflict, as did President Harry Truman and former Fed Chair Thomas McCabe. While Volcker finished his term, McCabe resigned prior to the end of his term under pressure from the White House.
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