Federal Reserve officials fiercely protect their separation from politics, but the presidential election is putting the institution on a crash course of partisan bickering.
Federal Reserve officials set policy independently of the White House, meaning that while presidents can push for lower interest rates, they cannot force central bankers to reduce borrowing costs. Congress oversees the Federal Reserve, but also has no power to directly influence rate decisions.
There is a reason for that separation. Politicians in power generally want low interest rates, which help stimulate economic growth by making borrowing cheaper. But the Federal Reserve uses higher interest rates to keep inflation slow and stable, and if politicians are forced to keep rates low and stimulate the economy all the time, that could allow those price increases to get out of control. .
In light of the Federal Reserve’s independence, presidents have largely avoided talking about central bank policy since the early 1990s. Pressuring officials to lower rates probably wouldn’t help, the administrations reasoned, and might actually backfire by prompting policymakers to keep rates higher longer to show they were independent of the White House.
But Donald J. Trump upended that norm when he was president. He called Federal Reserve officials “fools” and suggested that Jerome H. Powell, the chairman of the Federal Reserve, was an “enemy” of the United States for keeping rates too high. And he has already discussed the Federal Reserve in political terms while campaigning as the presumptive Republican nominee, suggesting that cutting interest rates before November would be a ploy to help President Biden win a second term.
Some of Trump’s allies outside his campaign have proposed that the Federal Reserve’s regulatory functions should be subject to White House review. Trump has also said that he intends to put all “independent agencies” under the control of the White House, although he and his campaign have not specifically addressed the direction of the Federal Reserve’s decisions on interest rates. interest.
Direct White House involvement in Federal Reserve policy seems “far-fetched,” said Gabriel Chodorow-Reich, an economics professor at Harvard. But he noted that administrations could undermine the central bank’s independence in more subtle ways, including through who they choose to nominate for key positions at the Fed (Powell’s term as chairman expires in May 2026) and through prolonged pressure campaigns. .
“There are elements of this that could happen that are not immediately cataclysmic, but over time, by reducing the independence of the Fed, they make it more difficult” for the Fed to make difficult decisions like raising rates to slow the economy, Chodorow said. Reich said.
And in the short term, the reality that the Federal Reserve seems likely to remain a political issue heading into the election has some economists wondering whether central bankers would feel comfortable starting to cut interest rates at their policy meetings. September or November, even if inflation cools enough for them to do so. Taking action just before the election could draw even more attention to the Federal Reserve.
But some economists think officials will continue cutting later this year if that’s what’s justified, regardless of the political backlash that might result.
“My guess is that, ceteris paribus, they would like to stay away from the top of elections,” said Donald Kohn, former vice chairman of the Federal Reserve and now at the Brookings Institution, referring to the Latin phrase that means everything else It remains the same. “Other things will not be the same. “Incoming data will be the main factor determining when they cut interest rates.”