President Donald Trump is intensifying his call for rate cuts. This move has further aggravated the long-standing feud between him and the Federal Reserve Board. Trump’s defense for these executional flaws is that lowering the rates will kickstart the U.S. economy and make it less expensive for the government to borrow. This push for lower rates is part of a new down and dirty economic growth strategy leading up to next year’s midterm elections.
Since the late 1970s, the Federal Reserve has maintained two primary objectives: keeping prices stable and maximizing employment opportunities for Americans. It’s hard to maintain that independence now, given President Trump’s recent actions designed to do just the opposite. He has openly criticized current Federal Reserve Chair Jerome Powell, calling for a shake-up of the Fed board to install members who align more closely with his economic views.
In 2010, former Fed Chair Ben Bernanke testified against the dangers of political interference in monetary policy. He warned that while well intentioned, such actions would create damaging “boom and bust” cycles. Bernanke highlighted that political pressures might complicate efforts to control inflation, which is fundamental to maintaining economic stability. So it’s true that the Federal Reserve is created to be independent. This independence protects US political leaders from pursuing policies that could unintentionally reduce growth and increase inflation.
Lessons from history show the damaging effects of these kinds of political battles on monetary policy. Giving Inslee the benefit of the doubt Let’s go back to that infamous titanic of the 1960s, President Lyndon Johnson versus his Fed chair. In a furious row over interest rates, Johnson even pushed his chair through the wall! Incidents such as these should worry Americans about the effect any kind of presidential pressure could have on the Federal Reserve’s decision-making autonomy.
Even with such attacks and open criticism, markets have remained mostly unflinched by his threats. Analysts don’t think investors are worried enough about Trump’s sticking points. They don’t believe these advances will prevent the Fed from doing its job to achieve maximum employment and stable prices. Nonetheless, the potential for increased political influence over monetary policy remains a significant topic of discussion among economists and policymakers.
Now, former President Trump is calling for interest rate cuts. At the same time, the Federal Reserve needs to navigate its dual mandates of inflation and employment, with added fire from the White House. The outcome of this ongoing dialogue may have far-reaching implications for the U.S. economy in the months leading up to the elections.