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No, Trump can’t lower interest rates. But does the president have power over the Fed?

President-elect Donald Trump plans to take over the White House with a set of bold promises, including lower interest rates.

American families have grown frustrated with two years of high borrowing costs. However, the president does not have the power to reduce it mortgage ratesCredit card APR or business loan rates. Interest rates result from a combination of economic factors, including the monetary policy of the Federal Reserve.

The Fed – the country’s central bank – began to gradually lower its benchmark interest rate during the fall. The Fed’s main decision-making body meets again this week, with another projected quarter-percentage-point cut on the agenda.

While Trump will have the power to appoint a new Fed chair in 2026, he does not have the ability to set monetary policy or change the federal funds rate directly.

There is a long history of presidents trying to interfere in the autonomy of the central bank. During his first presidency, Trump threatened to oust Fed Chairman Jerome Powell after the Fed began raising interest rates. More recently, the president-elect said he would not try to fire Powell before the end of the Fed chair’s term in 2026.

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Here’s a breakdown of what Trump can and can’t do regarding interest rates and the Fed.

Who determines interest rates?

The Federal Reserve sets the federal funds rate, a benchmark interest rate that banks pay to borrow money. This range of target interest rates indirectly influences the short-term rates that banks and lenders later charge customers on everything from credit cards to home and auto loans.

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The Fed lowers and raises its benchmark rate to keep prices relatively stable (with an ideal annual inflation rate of 2%) and unemployment low, according to Peter C. Earle, a senior economist at the American Institute for Economic Research.

To understand how it works in practice, think back to the early days of the COVID-19 pandemic. When the economy was cratering in 2020, the Fed lowered interest rates to zerohoping to encourage spending and investment at a time when people and businesses would otherwise hesitate. Then, when the economy rebounded two years later, the Fed raised interest rates to address rapid inflation.

What is the relationship between the Fed and the government?

The Federal Reserve was created by Congress in 1913 with the Federal Reserve Act. Congress can amend the Act to change the way the Fed operates.

The president’s primary relationship with the Fed is through his power to appoint the Fed chairman and other board members. Presidents often appoint Fed board members who align with their worldview. However, the appointments are staggered so that no one president has the power to completely overhaul the Fed, said Sarah Binder, a political science professor at George Washington University.

In theory, Trump could push for changes to the Federal Reserve Act through a Republican-controlled Congress. However, Binder said any changes to the rules governing the Fed would need a bipartisan coalition of 60 votes to pass the Senate.


What the president can do

What the president can not do

Appoint a new Fed chairman in 2026 (and appoint the members of the Fed chairman’s council as a whole when their terms expire)

Fire the Fed chair over simple disagreements. Fed chairs can only be removed “for cause,” such as misconduct or malfeasance.

Voice concern about monetary policy by publicly criticizing the actions of the Fed.

Set the interest rates directly for the country or for the banking institutions.


What power does Trump have over the Federal Reserve?

In 2018, during his first administration, Trump appointed Current Fed Chairman Jerome Powell. Two years later, Trump called him an “enemy.”. Powell’s term ends in 2026, and the president does not have the power to remove Powell before then. When asked in early November whether the president could fire or remove the Fed chair or other Fed governors, Powell replied: “It is not allowed below. the law”.

According to Earle, members of the Federal Reserve Board can only be removed “for cause,” which means proven misconduct or malfeasance or inability to perform work due to illness. Simple disagreements on policy or presidential frustration on interest rates are not enough on their own. “Those are not valid grounds for removal,” Earle said.

Presidents have another, if unofficial, power over the Fed: the bully pulpit. Some presidents have been known to rail against the Fed when the economy is bad, pressuring it to take one action or another. Trump himself did this during his first term threatening to remove the chair of the Fed when the economy almost collapsed in March 2020. Experts agree that Trump is likely to make these types of comments again.

“I don’t think anyone expects presidents, especially during today’s period, to completely tie their hands behind their backs,” Binder said.

Is the Fed really impartial and independent?

In theory, the Fed is independent, but in practice this is not always the case. According to Earle, it is almost impossible for an entity as important as the Fed to be totally above politics.

The Fed has many structures that insulate it from outside influence: long terms for board members, staggered appointment deadlines and removal projections for cause, for example. These all work to allow the Fed some autonomy and protect it from the whims of political leaders.

But ultimately, the Fed operates in the middle of the political system. “It can’t be hermetically sealed,” Binder said.

How will Trump’s policy impact future interest rate cuts?

Experts say Trump’s broader economic policies are unlikely to lead to faster or deeper cuts in interest rates. In fact, they could have the opposite effect.

Trump’s proposals for tariffs on foreign imports are likely to cause more inflation, which could influence the Fed to raise interest rates as it often does to fight inflation, according to Dean Bakera senior economist at the Center for Economic Policy and Research.

But experts say Trump’s biggest impact may be the sheer uncertainty he inspires, which can shake financial markets. His freewheeling policy statements often shock policymakers who are unsure of what direction he might take. Trump’s threats to fire Powell, regardless of whether he (or can) follow through, only adds instability to the mix.

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2024-12-16 16:14:20

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