President Trump had a message last week for the Federal Reserve while at the annual World Economic Forum gathering in Davos, Switzerland: He plans to “demand that interest rates drop immediately.”
Mr. Trump may be in for disappointment. The Federal Reserve widely expected to keep its benchmark rate steady when it announces its latest interest rate decision today at 2 p.m. Eastern Time. Economists aren’t penciling in a 2025 reduction until at least May, according to economists polled by financial data service FactSet.
Federal Reserve Chair Jerome Powell has over the years steadfastly defended the central bank’s independence. Most recently, he underlined at a New York Times event in December that insulating the Fed from political influence is “for the benefit of all Americans,” allowing it to make decisions based on economic data rather than at the behest of elected officials. The Fed’s independence allows it to pursue its dual mandate — to keep inflation low and the labor market at full employment — without political pressure, economists concur.
“We know monetary policy needs to be enacted with a democratic mandate underpinning it, with a day-to-day remove from politics,” Brett House, an economics professor at Columbia Business School, told CBS MoneyWatch. “Interest rates may need to be raised but it may be inconvenient for political interests, and [the central bank] may need to move quickly to lower rates” in case of an economic downturn.
While the Fed is an independent agency, it is accountable to Congress and the public, with its chair and other officials testifying before Congress regularly. Its dual mandate was also established by Congress, as well as its structure of staggered appointments for Fed officials, designed to make the agency less vulnerable to pressures “that could lead to undesirable outcomes,” according to the Fed.
What happens when a central bank isn’t independent?
Those “undesirable outcomes” can be seen in nations where central bankers are more vulnerable to political influence, economists say.
That’s because interest rates remain the most potent weapon that a central bank can wield against surging inflation — a tool that the Federal Reserve turned to in 2022 to tame the hottest U.S. inflation in 40 years. But elected officials sometimes decide that higher borrowing costs are politically inconvenient, because they make it more expensive for businesses to expand or for consumers to make purchases.
In cases where a central bank isn’t independent, officials may succeed in pressuring a central bank to keep a lid on rates.
Experts point to Turkey as an example of what can occur when political interests dictate a central bank’s monetary policies. Since 2010, its central bank has increasingly come under pressure from President Erdoğan to keep its interest rates low, even as inflation surged during the pandemic, according to the non-partisan Centre for Economic Policy Research.
Instead of hiking rates as Turkey’s inflation rate topped 80% in October 2022 on an annual basis, the nation’s central bank cut its benchmark rate several times in 2022 and 2023. While the bank reversed course and hiked rates starting in mid-2023, inflation there has proved tough to tame, with prices rising by 44% in December 2024.
By comparison, the highest U.S. inflation rate during the post-pandemic period was in June 2022, when inflation hit 9.1% on an annual basis in June 2022. In the face of the Fed’s rate hikes, inflation has cooled since then, deflating to 2.9% on an annual basis last month.
“The Fed has done really well — they have raised the rates enough to try to slowly squeeze inflation out of the market,” noted Erasmus Kersting, a professor of economics at Villanova University. The Fed has “done all that while avoiding a recession — that is a delicate needle to thread.”
Could Mr. Trump influence the Fed?
Questions about Mr. Trump’s ability to influence the Federal Reserve or shake up its leadership are intensifying amid the president’s statements about his desire for lower interest rates. During his 2024 election campaign, Mr. Trump had insisted that as president he should have a “say” in the Fed’s interest rate policies.
“I think that, in my case, I made a lot of money, I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman,” Mr. Trump said in August.
For his part, Powell said last year that he would not resign even if asked to do so by Mr. Trump, adding that under the law presidents may not fire or demote the Fed chair. Powell’s term as Fed chair ends May 15, 2026.
However, Mr. Trump has recently fired several government officials in ways that critics say violate the law, such as his administration’s firing of more than a dozen federal inspectors general on Friday. Federal law requires the White House to give Congress a full month of warning and case-specific details before firing a federal inspector general.
Removing Powell wouldn’t necessarily change the Fed’s monetary policy decisions, given that rates are set by the 12-person Federal Open Market Committee (FOMC). Seven members are from the Fed’s Board of Governors; four are assigned from the 11 Reserve Bank presidents, who each serve one-year terms on a rotating basis; and one FOMC member is the president of the Federal Reserve Bank of New York.
Interfering with the Fed could have consequences, both legally and for the stock market, experts said.
“Should any president attempt to fire the chairman of the Federal Reserve without cause other than doing the job they were appointed and confirmed to do, I expect there to be swift legal challenges,” noted Tim Stretton at the Project on Government Oversight, a nonpartisan government watchdog. “I suspect the market would also react negatively. Markets like stability, and this level of unprecedented interference in the Federal Reserve would be anything but stable.”
Asked what advice he would give Mr. Trump about dealing with the Fed, Columbia Business School’s House said, “Stop talking.”
He added, “Let the Fed conduct its business consistent with its mandate, and it’ll be more likely to get interest rates down.”
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