Author: Li Dan, Wall Street Journal
Although Fed officials have always touted their decision-making and politics as "insulated," for Fed Chair Powell, Trump's election means new troubles are coming. Because Trump has previously liked to "point fingers" at the Fed, believing that the president has a say in this area, the policies promised by Trump's campaign may overturn the economic prospects of the United States and change the Fed's policy considerations in the coming months.
Trump has promised to take more aggressive tariff measures against US trade partners, expel millions of illegal immigrants, and extend the tax cut policy of 2017. In October this year, 23 scholars who have won the Nobel Prize in Economics, including the two winners this year, issued a joint letter calling for support for Harris, and their main reason for opposing Trump's election was that Trump's proposed foreign tariffs and domestic tax cuts would lead to rising prices, expanding government deficits, and exacerbating domestic inequality.
Derek Tang of LH Meyer/Monetary Policy Analytics believes that Fed policymakers will be more cautious in handling when and how much to cut interest rates, as they need to assess how Trump's economic plans will be implemented. Tang said:
"Marginally, they (Fed policymakers) may think that in the next few years, tariffs or reduced immigration may bring higher inflation risks. Their mindset may be, 'By slightly slowing down the pace of rate cuts, we can give ourselves more time to observe actual inflation expectations and labor market conditions.'"
Bank of America Merrill Lynch analysts reported this Tuesday that if Trump takes office and expands fiscal policy, the Fed may raise its neutral rate expectations. Furthermore, if Trump significantly raises tariffs, the Fed may pause rate cuts out of concerns about the impact on inflation and economic growth.
Journalist Nick Timiraos, known as the "New Fed Newswire," wrote after Trump's victory that Trump's election will not currently affect the Fed's stance on monetary policy, unless the Fed has fully understood Trump's specific measures in the areas of domestic taxes, tariffs, and immigration policies. If the Republican Party wins both the Senate and the House, the Fed may "start to modify some of its basic assumptions" at its meeting in December this year.
Trump's public criticism may raise doubts about the Fed's independence
In August this year, Trump stated that the US president should have a certain say in interest rates and monetary policy, criticizing the Fed's adjustment of interest rates as "a little too early, or a little too late," and later hinted that the Fed's 50-basis-point rate cut in September was for political reasons. In October, he said he believed he should not order the Fed to do anything, but had the right to comment on the direction of interest rates.
Bloomberg reported that Trump's policies make the Fed's future work more complicated, because the Fed seeks to bring the inflation rate back to its 2% target, while also including the labor market. If Trump publicly attacks Powell again as he has done before, the Fed may find itself in an unsettling political spotlight when it is already in a precarious position to achieve its goals.
Trump's series of remarks have led outsiders to speculate that he may try to limit the Fed's autonomy after taking office. The report mentioned that legal scholars have pointed out that Trump considered firing Powell during his first presidential term, and such an unprecedented move would raise legal controversies.
Sarah Binder, a political science professor at George Washington University, believes that the president's public criticism of the Fed may raise doubts among outsiders. The Fed's structure is of course independent, but "if people start to doubt whether the Fed will do what it says it will do, then no degree of structural isolation can protect it."
Former Trump chief economic adviser Hassett may become the next Fed chair
Kevin Hassett, the former chief economic adviser to Trump who served as chairman of the White House Council of Economic Advisers during Trump's tenure, said that doubts about coordination between the Fed and the executive branch should be taken seriously, and "the next administration should choose a neutral Fed leadership."
Wall Street Journal previously mentioned that even if he becomes US president, Trump has few ways to control the Fed. The president has the right to nominate a candidate for Fed chair, but the final decision is in the hands of the Senate, and the Constitution grants the Fed a high degree of independence, so the president cannot dismiss the chair solely due to policy differences. If the president insists on firing him, he may also need a clear court ruling.
The president can also influence monetary policy by nominating the seven members of the Fed's Board of Governors, which is the most direct way for Trump to influence the Fed in the coming years. However, these nominations also require Senate confirmation, and the process of replacing members is deliberately designed to be slow.
Powell's term as Fed chair will end in May 2026, and his term as a Fed governor will expire in January 2028. The term of Fed Governor Adriana Kugler will expire in January 2026. Trump will have the opportunity to appoint people to these positions in the next four years.
Bloomberg reported that several sources close to Trump's campaign team said Hassett could be Trump's eventual choice to nominate as the next Fed chair.
In addition, Fed Vice Chair for Supervision Barr's term will end in July 2026. Barr initially proposed a plan that would require banks to increase their capital by 16%, which was criticized by the banking industry and Republicans.
In an October research report, JPMorgan Chase chief US economist Michael Feroli pointed out that if Barr resigns quickly like his predecessor after a president from the opposing party takes office, Trump could quickly influence regulatory policy, even if he cannot directly influence monetary policy.
