Donald Trump’s advisers have reportedly drawn up secret plans to overthrow the Federal Reserve chairman and allow the president to set interest rates.
The allies are said to have drawn up a series of proposals for how monetary policy could be shaped in a second Trump administration, including rolling back the central bank’s independence, which has recently been critical to the functioning of the economy and financial system crucial importance was decades.
According to the Wall Street Journal, supporters of the Republican candidate have put together a 10-page document with a new vision for central bank leadership and monetary policy.
This includes the authority to remove Jerome Powell from his position as chairman of the Federal Open Market Committee.
Mr. Trump appointed Mr. Powell to the position in his first term as president after he refused to give incumbent Janet Yellen a second term at the Federal Reserve.
Ms. Yellen is now President Joe Biden’s Treasury secretary.
The document also suggests that Mr. Trump could be consulted on interest rate decisions by the chairman of the Federal Reserve, who would then negotiate on his behalf with other policymakers over the final decision on borrowing costs.
Less sweeping changes to the central bank could include its regulations being subject to more regular reviews by the White House, the WSJ reported.
As president, Mr. Trump regularly called for lower interest rates to stimulate the economy and expressed dissatisfaction with Mr. Powell’s decisions. In 2019, he said Fed officials had “no courage, no sense, no vision.”
Moves to limit the Fed’s independence would likely prove controversial. The independence of central banks has become a central pillar of the modern financial system.
Michael Pearce of Oxford Economics said: “Any serious attempt to undermine the Fed runs a high risk of having the opposite effect.” There are many examples from history where political pressure for lower interest rates has had the opposite effect and prompted the Fed to turn to tighter monetary policy than usual.”
Even if interest rates fell, financial markets would recognize the risk of higher inflation and charge the U.S. government higher borrowing costs to compensate. This would compensate for an expected economic boost.
The president’s temptation to cut interest rates under the proposed system could also prolong the inflation crisis in the US.
James Knightley, an economist at ING, said: “If Trump lets inflation run rampant, his own supporters are likely to suffer the most.” Trump may want lower interest rates, but if inflation becomes entrenched, that could be the bigger threat to the success of his presidency represent.”
Strong consumer spending and stubborn inflation have raised expectations that the Fed will have to keep interest rates higher for longer to contain price increases.
New figures showed on Friday that core inflation remained stable at 2.8 percent in March, not falling as analysts had expected.
Charles Hepworth of GAM Investments said this rate of price increase would force Mr Powell to keep interest rates unchanged.
He said: “This is a level that is unlikely to lead to early rate cuts.”
Interest rates, which are at 5.5% in the US, are expected to play a key role in this year’s elections. Traders in financial markets have only priced in one rate cut this year, most likely in November.
If this forecast holds true, the timing of the election means Americans will not benefit from lower borrowing costs when they go to the polls.
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