Extremely, President Trump has put pressure on Federal Reserve Chairman Jerome Powell to cut interest rates. This raises concerns associated with the independence of the Federal Reserve. And it’s reasonable. Generally speaking, the more central banks come from political pressure, the better the country’s economy will work with financial measures like inflation (Intersted readers can find a literature review here). In fact, the Banking Act of 1935 significantly changed the structure of the Federal Reserve system, making it more independent of the administrative division and Congress in general.
To be fair, Trump isn’t the only one trying to reduce the independence of the Federal Reserve. Those leaning towards libertarians are also hoping for red Fed independence with slogans like “Fed!”.
But how much does an individual president have to do with the Fed’s monetary policy? Probablay, not Muum.
Montarypoly is decided by the Federal Open Market Committee (FOMC) and by a 12-person committee consisting of seven members of the Federal Reserve Committee, the president of the New York chapter of the Federal Reserve Bank, and four rotating Federal Reserve Bank presidents from other branches. Of these 12 members, only the government committee has been approved by the President for 14 years (and confirmed by the Senate). Only one of his current members (Jerome Powell, Philip Jefferson, Michelle Bowman, Michael Burr, Lisa Cook, Adriana Coogler, and Christopher Waller) has expired during this Trump administration (Adriana Kugler). Powell’s Terce, when the chairman expires, will remain on the board until his 14-year term is over. Assuming each individual is offering an entire term, Trump could only hold back on this 12-person committee. Even if this person is a puppet, one vote is not the majority. Even if Trump wants to include the three current members appointed to his first Terte, that still only means four out of 12 votes.
Now readers will notice the problem with that last sentence. “John, you’re a handsome devil in sly,” I hear you cry, “Those are 14 years, but how could Trump have appointed three people in his first Terte?” Not all Fed governments will remain in the entire term. These are the sum of people in the mandmand in the financial world. The 14-year term represents the opportunity cost of HGE, with terts of forgotten salaries from other alternatives. The reason many people left before them is that they intend to do other people’s jobs.
For conversation, let’s assume that all seven members of the board will resign before their term rises and the president can appoint (and be confirmed). In that (exceptionally unlikely) scenario, it is positive that the president manipulates monetary policy.
But as Jason Furman (the former head of the CEA under Obama and current Professor Harvard) reminds us, the Federal Reserve is not technically a central planner.
President Trump is focusing on the Fed’s chair, which cuts rates significantly.
1. Fed chairs are 1 out of 12 votes, and political hack chairs do not win a majority
2. Even if FFRs significantly reduce the fees they care about like mortgages, they could rise with higher experience inflation
The Federal Reserve sets only a handful of interval rates, and they are limited to interbank rates – discount rates (rates that banks can borrow from the Fed) and interest rates paid on the Fed’s bank reserves. Through the FOMC business, FOM tries to influence each other’s federal funding rates, but does not set that rate.
The current rates you and I are still determined by market factors such as risk, inflation, supply, demand, and more. It has no power. Yes, it tries to affect the race, but it doesn’t set them.
Therefore, even if the president can fully manipulate monetary policy, it is unlikely that it will lead to the outcome they want. If the Federal Reserve interstrate falls unfairly, commercial banks can predict more inflation, leading to an increase in nominal interest rates charged to consumers. If the president is mad at this (predictable) event shift, price management threats and other “solutions” could continue, and even do something even worse.
Concerns about the Federal Reserve’s independence are legal, but many things are wrong and they can lose their independence.
