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When news outlets called Donald Trump’s election defeat in November 2020, my neighbours in Washington DC celebrated by banging pots and pans from their windows. Because nothing says, “This is nearly over” like the clang of a kitchen implement. Except it wasn’t nearly over. Exactly a year from now, Trump could re-enter the White House.
Among the many questions raised by the prospect of a second Trump presidency is how hard will monetary policy makers be bashed. So far, the former president has not hit the Federal Reserve particularly aggressively. In an interview last September with NBC News, he said interest rates were “too high”, but when asked whether he would direct Fed chair Jay Powell to lower them, he said “it depends”. Inflation, which in his victory speech after Monday’s Iowa caucuses he called “a country killer”, is apparently a more pressing concern.
That could frame a clash in the run-up to the election. If the real economy starts to weaken, the Fed may decide that high rates are no longer necessary. (Inflation has been falling fast enough that lowering it is no longer the Fed’s sole focus.) Cue attacks that the Fed is juicing the economy to help President Joe Biden win.
The suggestion that the Fed might move early to avoid accusations of partiality is already swirling around Washington DC. At his last press conference, in December, Powell said, “We don’t think about politics”. The experience of the past 30 years suggests that America’s monetary policy makers have few qualms about moving in election years. In 2004, for example, they lifted rates dramatically, while in 2008 they did the reverse.
If Trump wins, he will take office at a time when the Fed expects inflation to be much closer to 2 per cent. So barring any further shocks, it seems likely that he will become more vocal about keeping rates low. He seems to think such behaviour gets results. In the NBC interview, he described “jaw-boning” Powell during his first term, and noted that interest rates then fell.
Surprisingly, there is some evidence that investors agree. One study compared pricing of financial contracts before and after presidential tweets, and found that each one raised expectations of a rate cut over the next year. (Admittedly, a different study found that the effect on rate expectations faded over time.) Another found that exchange rate volatility rose on the day of Fed-related Trump tweets.
Beyond the CAPS LOCK hectoring, there are other ways Trump could chip away at the Fed’s credibility. Inserting political personnel is the obvious one. Steve Moore of the Heritage Foundation, an informal adviser to Trump on the economy, says that a President Trump would probably replace Powell.
Although it is unclear whether the Fed chair could be sacked over a policy disagreement, his term as chair ends in 2026, and his term on the board in 2028. The term of board member Adriana Kugler ends in January 2026.
Last time the Senate blocked Trump’s more controversial candidates, including Judy Shelton of the Independent Institute. That could be less of an obstacle come 2026, depending on who voters plump for. Moore reckons frontrunners would include Shelton, Kevin Warsh of the Hoover Institution or perhaps Arthur Laffer of Laffer curve fame.
A chat with Shelton gives a flavour of the debates to come. She is confident that fewer regulations and reduced taxes would spur growth, and points out that stifling demand by raising interest rates makes life difficult for entrepreneurs who would otherwise be willing to expand output. And she says it would be “truly ludicrous” if the Fed set interest rates too high, “just to prove that they haven’t caved to what an administration wants them to do”.
Even if Trump only inserted two of 12 voting Fed board members, it could send a message about the central bank’s future immunity from partisan politics. More immediately, a political chair could become less effective at communicating the committee’s views.
The biggest challenges posed by a Trump presidency are the hardest to predict. A 10 per cent tariff on all imports — if he could enact it — would provoke retaliation. A loss of respect for the rule of law is impossible to feed into a macroeconomic model, but would certainly have deep effects.
“Volatility would be well deserved,” says Julia Coronado of the consultancy MacroPolicy Perspectives. As if the Fed’s job wasn’t already complicated enough.
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