Next week America will choose a new president. According to one poll, 58% of bankers believe former U.S. President Donald Trump would be better for the financial sector vs. 35% who think the policies of Vice President Kamala Harris would be more beneficial.
But while bankers may favor President Trump, they are not big fans of his push to make the Federal Reserve more subservient to the president. According to a recent bank industry survey, only 5% would support an effort to “force” the Fed to consult with the president on interest rate decisions, and just 7% wanted to give the president the power to demote or replace a Fed chair. (Disclosure: I was hired by IntraFi to help design the survey on Fed autonomy. However, I do not receive any financial compensation from individuals participating in its poll.)
The Fed is the nation’s leading independent agency. Because it does not rely on Congress and the White House for annual budget appropriations, it does not have to worry that its funding (which primarily comes from the interest earned on the securities it owns) will be cut off if it decides to raise interest rates. Furthermore, the leadership of the central bank (the governors and Fed Chair) are appointed for a term and cannot be removed from office by the President simply because of a policy disagreement.
While other agencies are legally established as “independent,” few have the level of autonomy the Fed does. The vast majority of these departments rely on Congress for funding and many political appointees, such as the Administrator of the Environmental Protection Agency (EPA), can be fired at will by the President.
While he was President, Donald Trump often sparred with current Fed Chair Jerome Powell over interest rates, arguing that the discount rate was too high and put the U.S. at a disadvantage in relation to our global economic competitors. In September of 2019, when the central bank did not cut rates as deeply as the former President wanted, Trump stated that Powell and the Fed “don’t have a clue” and that “Jay Powell and the Federal Reserve Fail Again.”
The issue of the Federal Reserve’s independence to set monetary policy and enact bank regulation has long been a focal point of debate. President Trump is hardly the first (nor last) elected official to call for the Fed to be less autonomous. Both those on the left and the right have proposed to “reform the central bank” and restrict the agency’s power (although their approaches can sometimes differ). But the former President is certainly one of the most vocal critics of the agency in history, and has argued that under current law the President could replace or demote the Fed Chair (even though the legal experts disagree).
But given that bankers are wary of most proposals to reduce Fed autonomy (except on the margins such as shorter terms of appointment), and the difficulty of getting 60 votes in the Senate to change the central bank’s legal status, it is unlikely that Trump would get his wish to have greater control of interest rate policy should he win tghe race.
However, the next president will get to decide whether or not to replace Powell with someone new. That choice will give a future President Trump or Harris their best chance to influence the direction of interest rate policy for the next four years. One would suspect that if elected, President Trump would more carefully vet Powell’s replacement to ensure greater fealty to the Oval Office.
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