Trump’s Victory in the Presidential Election Could Have Major Consequences for U.S. Monetary Policy

The newly elected American president Donald Trump spent his first presidency attacking the Federal Reserve and pressuring policymakers to lower interest rates, calling them various derogatory names. This rhetoric is now very likely to return to the White House as Trump has promised that interest rates will be lowered as soon as he takes office – although rates are determined by the politically independent FED and the president of the United States has no direct control over them.

The question that has loomed over the markets and the FED itself in the past week since he won the election is whether Trump will do anything more than mere talk this time as he tries to achieve what he has set out to do because, although the FED is currently in the process of lowering interest rates, it is still unclear whether it will do so quickly enough to satisfy Trump.

The FED is independent of the White House so that the central bank leaders can make decisions freely, but many are concerned that the FED’s independence from politics could be under pressure in the years to come due to numerous statements from Trump. The reason for this is the fact that the central bank leader Jerome Powell‘s term ends in May 2026, so Trump could replace him with someone more to his liking as Powell has found himself under Trump’s fire in recent years for resisting his calls to sharply lower interest rates.

Trump flirted with the idea of firing or demoting Powell during his first presidential term, but his team concluded that it would be legally complicated and could be impossible.

Over the next few years, other positions at the FED will gradually open up, allowing Trump to place his people in the central bank.

Freedom of Choice

– Trump’s ability to reshape the FED is likely to be understood only gradually over time – wrote Michael Feroli, chief economist at J.P. Morgan, in an analysis.

In addition to the new FED president, Trump will appoint two new governors whose terms expire in the coming years. Trump will also be able to appoint a new vice president for supervision – this powerful regulatory role oversees the operations of the central bank.

However, whoever Trump nominates to fill certain roles at the FED will have to pass Senate confirmation, and since Republicans have gained control of that body, the newly elected president will have much freedom in choosing someone whose views reflect his own.

Who sits on the FED is extremely important as Trump will almost certainly advocate for low interest rates if he respects what he said during the campaign. This would break a decades-long tradition in which presidents typically avoid discussing central bank policy out of respect for the institution’s independence.

The line between the White House and the FED could become blurred if Trump appoints a leader willing to carry out his orders. Such cases have occurred throughout history: it is known that Arthur Burns kept interest rates too low for too long while he was president of the FED due to Richard Nixon‘s policies, and many believe that decision contributed to the high inflation of the 1970s.

It is worth noting that every president changes personnel at the FED, and before Bill Clinton‘s presidency, it was somewhat normal for the White House to complain about the central bank’s interest rates, writes the New York Times.

The only currently important question is whether Trump would try to influence the central bank with more creative approaches, but one thing is certain: the newly elected president believes he should ‘have a say’ in making decisions about U.S. monetary policy.