In Tuesday's presidential election, Trump's victory has brought profound uncertainty to the economic outlook of the USA, which may change the policy decisions of the Federal Reserve in the coming months, and also raised questions about how Trump may pressure the Federal Reserve during his potential second term in the White House.
During the campaign, Trump promised to take a more active approach to imposing tariffs on the USA's trading partners, deporting millions of illegal immigrants, and continuing the tax cuts from 2017. Once these policies are implemented, they may drive up prices, wages, and the federal deficit.
This will make the work of the Federal Reserve more complex as officials are striving to lower the inflation rate to the target of 2% while protecting the job market. In this delicate task, if Trump continues to publicly criticize Federal Reserve Chairman Powell as he has done in the past, the Federal Reserve may find itself under an awkward political spotlight.
Federal Reserve officials are expected to cut the benchmark interest rate by 0.25 percentage points on Thursday, following the 0.5 percentage point cut in September. According to median forecasts released in September, they expect another 0.25 percentage point rate cut in December this year, and another one percentage point cut in 2025.
However, policymakers may exercise caution in determining when and how much to cut interest rates as they need to assess how Trump's economic proposals will translate into actual policies. Economist Derek Tang from LH Meyer, a monetary policy analysis firm, said: 'They may think that in the coming years, there could be a higher risk of inflation due to tariffs or reduced immigration. Their mindset might be 'by slightly easing on rate cuts, we can have more time to observe inflation expectations and actual conditions in the labor market.'
The independence of the Federal Reserve
During his first presidential term, Trump frequently criticized Powell, and such comments have continued during the recent campaign period. Trump has expressed his belief that the President should have a say in the Fed's rate policy, but also stated that he should not directly order the Fed on what to do, but rather has the right to express opinions on the direction of rates.
Trump's remarks have raised concerns that he may be trying to limit the independence of the Federal Reserve, breaking the long-standing central bank's independent practice of setting monetary policy. During Trump's first term, he had discussed the possibility of firing Powell, a move legal scholars believe would be unprecedented and legally controversial.
Nevertheless, the Federal Reserve has mechanisms in place to protect itself from presidential interference. For example, the President's appointment of members of the Federal Reserve Board of Directors requires Senate confirmation, and Congress committees also oversee the Federal Reserve. Powell and other officials have repeatedly assured the public that their decisions will not be influenced by political factors.
However, public and frequent criticism of the Federal Reserve by the President can still raise doubts. Sarah Binder, a political science professor at George Washington University, said: 'Despite the structural independence of the Federal Reserve, if people start to doubt whether it will fulfill its commitments, then there is no structural guarantee that can fully protect it.'
Some of Trump's advisers have dismissed concerns that he might interfere with the Federal Reserve. Scott Bessent, Trump's economic adviser and CEO of the hedge fund Key Square Group, said: 'He does not want to personally intervene in decision-making, but only wants his voice to be heard. He understands the role of central bank independence in anchoring long-term inflation expectations.'
Kevin Hassett previously served as Chairman of the White House Council of Economic Advisers during Trump's first presidential term. In an interview with Goldman Sachs in October, he stated that speculations about coordination between the Federal Reserve and the executive branch 'should be taken seriously, and the next government should choose a neutral leadership for the Federal Reserve.'
In the coming years, Trump's most direct way to influence the Federal Reserve will be through key appointments. He has stated that he will not reappoint current Federal Reserve Chairman Powell, whose term will end in May 2026. Additionally, the term of Federal Reserve Board member Quarles will expire in January 2026, while Powell's term as Board member will end in January 2028. Trump will have the opportunity to appoint new candidates for these positions.
Several sources close to Trump's campaign team indicate that Hassett may become Trump's final choice for Chairman.
In addition, the newly elected president can also nominate a Vice Chairman responsible for oversight, a role with significant power in regulating the nation's largest banks. President Biden's current appointee, Michael Barr, will end his term in July 2026. Barr faced strong criticism from the banking industry and Republicans for proposing initial plans to increase bank capital requirements, which the Federal Reserve and other regulatory agencies are revising.
JPMorgan's chief economist Michael Feroli wrote in an October research report that officials who have served in this position in recent terms have resigned shortly after a president from the opposing party is elected.
Feroli pointed out that if Powell follows this precedent after Trump's election victory, the new president can quickly influence regulatory policies, although the impact on monetary policy may not be immediately apparent.
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