Trump’s plans stir fears for Fed independence, inflation

Trump’s comments during a Thursday press conference were the former president’s most direct acknowledgment of his longstanding desire to chip away at the central bank’s independence. If he wins the election and follows through on his pledge to directly influence monetary policy, Trump would break with decades of precedent.

Economists and scholars have long argued for central bank independence on the theory that politicians prefer lower interest rates, though that can lead to inflation.

Fed officials have assiduously guarded their ability to set interest rates without political inference since the 1970s, when high inflation was blamed in part by President Nixon’s success in persuading the Fed chairman, a former economic adviser, to keep rates low before the 1972 election.

‘Awful history’

“There’s an awful history of presidents trying to exert dovish pressure on Fed chairs. It hasn’t ended well," said Mark Spindel, an investment manager who co-wrote a history of Fed independence. While presidential pressure to lower rates is “nothing new, having a direct input to the process is a whole different thing."

On Thursday, Jared Bernstein, chairman of President Biden’s Council of Economic Advisers, posted on X a quote from a May council report on the importance of central bank independence: “History could not be clearer regarding the lasting and damaging inflationary consequences of ignoring this lesson or reversing the hard-earned progress of the past half century."

The former president didn’t explain in detail what kind of role he envisions for himself, arguing only that he should have a say in setting interest rates. But he said he is more qualified to make decisions than many Fed officials about monetary policy because of his business experience. “I made a lot of money," Trump said. “I was very successful and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman."

Trump suggested that he thinks the Fed’s decisions are based on little more than what he called a “gut feeling," and he said the central bank has “gotten it wrong a lot." Fed Chair Jerome Powell, he said, tends to be a “little bit late on things. He gets a little bit too early and a little bit too late."

The Trump campaign declined to comment on the former president’s remarks.

While Trump says he knows better than the Fed when rates should change, his views often reflect political considerations as well. With inflation falling and the labor market cooling, the Fed is expected to soon cut interest rates, probably starting in September.

Trump disagrees, calling any cut before the November election a gift to Democrats. In a recent Bloomberg Businessweek interview, Trump said it is something central bank officials “know they shouldn’t be doing."

Trump vs. Powell

As president, Trump frequently railed against Powell, spearheading an unusual campaign—in social-media posts, speeches and interviews—to pressure the Fed chair to do his bidding, browbeating him first for raising rates and later for not lowering them enough. Powell resisted, infuriating the then-president who ramped up his attacks, suggesting on X (then called Twitter) that Powell was a “bigger enemy" to the U.S. than Chinese President Xi Jinping.

While Trump hasn’t been specific in how he would exert control over the Fed, some advisers have laid out options.

The Wall Street Journal reported in April that a group of Trump’s allies had drawn up a 10-page document outlining options for blunting the Fed’s independence. The document recommended that Trump should be consulted on interest-rate decisions and makes the case that Trump would have the authority to oust Jerome Powell as Fed chair. The Trump campaign said at the time that policy discussions aren’t official unless they come directly from the campaign.

The Journal reported in April that several people who have spoken with Trump said he appears to want someone in charge of the Fed who will, in effect, treat the president as an ex officio member of the central bank’s rate-setting committee. Under such an approach, the chair would regularly seek Trump’s views on interest-rate policy and then negotiate with the committee to steer policy on the president’s behalf. Some of the former president’s advisers have discussed requiring that candidates for Fed chair privately agree to consult informally with Trump on the central bank’s decisions, according to people familiar with the matter.

Others close to Trump strongly disagree with that approach. Several economic and financial-market analysts who have counseled the former president and GOP nominee on economic issues have warned that efforts to erode the Fed’s independence are a bad idea.

Robert Lighthizer, Trump’s former trade ambassador and an adviser, told the Journal earlier this year, “It’s a great accomplishment that America eventually got to an independent Federal Reserve system. The last thing I’d suggest is to do anything to change it."

If elected this fall, Trump would have little ability to influence the Fed until 2026, when Powell’s four-year term expires as chair and when another governor’s term expires.

Powell last month said the U.S. economy has been served well by having a central bank that can set interest rates without direct interference by the White House. “The record is pretty clear" that a central bank that operates outside of political factors and direction is “a good institutional arrangement that serves the public well," Powell told lawmakers on Capitol Hill. Many Republican elected officials have also defended the current arrangement.

Last week, Powell fiercely disputed suggestions that the Fed would be influenced by politics. “Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks, and not on anything else," he said.

Write to Andrew Restuccia at andrew.restuccia@wsj.com and Nick Timiraos at Nick.Timiraos@wsj.com