What’s at stake with the Fed, now that Trump has won?
Summary
- The president-elect has said he wants a say on interest rates, and his policies may alter the growth and inflation outlook.
When Federal Reserve officials decide this week on the path for interest rates, they will have a new factor to consider: the re-election of Donald Trump.
Not only could Trump’s policies affect the path for inflation and growth, his return to the White House also poses questions about the Fed’s freedom to set rates without political interference.
Fed policymakers are still widely expected to cut their short-term interest-rate target, currently 4.75% to 5%, by a quarter of a point at their meeting that concludes Thursday, after a half-point cut in September. Thereafter, the path is less certain. Officials had signaled another quarter-point cut in December and four next year.
But the prospect that Trump could raise tariffs and cut taxes, spurring inflation and economic growth, has prompted some in the markets to reconsider. On Monday, before the election, interest-rate futures reflected a 55% chance that the Fed’s benchmark rate would be below 3.75% a year from now, according to CME FedWatch. That probability had fallen to 34% by midday Wednesday. Nomura economists said Wednesday that they expect the Fed to proceed more cautiously with rate cuts in 2025, cutting by just a quarter point, “until the realized inflation shock from tariffs has passed."
The actual effect of Trump’s policy proposals on growth or inflation are highly uncertain, and would depend partly on the makeup and inclinations of Congress and trade negotiations with other countries.
Trump appointed the current Fed chair, Jerome Powell, in 2018, then later demanded Powell stop raising rates, and subsequently that he cut them. Powell resisted those entreaties.
The question now is, do Trump and his allies really want to encroach on the Fed’s independence to steer interest rates? And if so, could they?
Trump and his advisers have given mixed signals. Trump has said he should be consulted on the Fed’s interest-rate decisions, and a group of his allies drafted proposals earlier this year that would require candidates for Fed chair to privately agree to consult informally with Trump on the central bank’s decisions, The Wall Street Journal reported.
But Trump has also told Bloomberg that while he wanted to weigh in on monetary policy, he didn’t necessarily want to order the Fed what to do. Some advisers have asserted the importance of the Fed’s independence.
Congress designed the Fed to operate with considerable autonomy, giving it a number of legal and structural protections against interference by elected leaders. The idea, shared by major economies around the world, is to empower central bankers to respond to high inflation by raising interest rates—often an unpopular measure.
Trump’s most direct way of increasing his influence at the central bank would be to install loyalists on its seven-member board of governors, in particular the chair. Powell’s term as chair expires in May 2026. His separate term as governor expires in January 2028. Most legal experts say he can’t be removed before the end of his term without cause.
Trump has limited opportunities for replacing Fed policymakers. Only two of the current seven governors have a term that expires in the next four years: Adriana Kugler in 2026 and Powell in 2028. At one point in Trump’s first term, there were four vacancies.
Even then, the Senate must confirm a president’s nominees. Senate Republicans effectively blocked some of Trump’s intended candidates in 2019 and 2020, believing them susceptible to presidential cajoling.
Moreover, the Fed chair and six other governors hold only seven of 12 voting seats on the committee that sets interest rates. Presidents of five of the Fed’s 12 regional reserve banks fill the other slots on a rotating basis. Most are apolitical technocrats who prize the central bank’s institutional tradition of independence.
That said, it is uncommon for Fed governors to serve the entirety of their terms, which are for as long as 14 years. If any current governor resigns, that would create a vacancy for Trump to fill.
Some in Trump’s orbit have proposed Trump announce a nominee for Fed chair before Powell has stepped down. The nominee’s public statements about monetary policy could potentially cause bond yields in the market to rise or fall, effectively accomplishing the same thing as actual rate changes.
Write to Paul Kiernan at paul.kiernan@wsj.com
