Federal Reserve officials have strongly advocated for their separation from politics, but the presidential election is putting the institution on a crash course with partisan infighting.
Fed officials set policy independently of the White House, meaning that while presidents can push for lower interest rates, they cannot force central bankers to lower borrowing costs. Congress oversees the Fed, but it also lacks the power to directly influence interest rate decisions.
There is a reason for this separation. Incumbent politicians generally want low interest rates, which stimulate economic growth by making borrowing cheap. But the Fed uses higher interest rates to keep inflation slow and stable — and forcing policymakers to keep interest rates low and constantly stimulate the economy could cause those price increases to spiral out of control.
Given the Fed’s independence, presidents since the early 1990s have largely avoided discussing central bank policy at all. Governments have argued that pressuring officials to cut interest rates will do little to help and could actually backfire by pressuring policymakers to keep interest rates higher longer to prove they are independent of the White House .
But when Donald J. Trump was president, he turned that norm on its head. He called Fed officials “blokes” and suggested that Jerome H. Powell, the Fed chairman, was an “enemy” of America because interest rates were too high. And he has already spoken about the Fed in policy terms as he enters the campaign trail as the presumptive Republican nominee, suggesting that cutting interest rates before November would be a ploy to help President Biden win a second term.
Some of Mr. Trump’s allies outside his campaign have suggested that the Fed’s regulatory functions should be subject to review by the White House. Mr. Trump has also said he intends to bring all “independent agencies” under White House control, although he and his campaign have not specifically addressed steering the Fed’s interest rate decisions.
A direct influence from the White House on Fed policy seems “far-fetched,” said Gabriel Chodorow-Reich, an economics professor at Harvard. But he noted that governments could undermine the central bank’s independence in more subtle ways, such as by who they nominate to key Fed positions (Mr. Powell’s term as chairman expires in May 2026) and through widespread pressure campaigns.
“There could be elements that come into play that are not immediately catastrophic, but over time, by limiting the Fed’s independence, it becomes more difficult for the Fed to make difficult decisions, such as raising interest rates, to slow the economy,” Mr. said Chodorov- said Reich.
And in the near term, with the Fed likely to remain a political issue in the run-up to the election, some economists are wondering whether central bankers would feel comfortable starting to cut rates at their meetings in September or November, even if If inflation cools down sufficiently, they will be asked to do so. A move just before the election could draw even more attention to the Fed.
But some economists expect officials to cut interest rates later this year if warranted, regardless of the political backlash that could result.
“I suspect that, ceteris paribus, they want to stay out of the election,” said Donald Kohn, a former Fed vice chairman who now works at the Brookings Institution, referring to the Latin phrase that means “everything else.” is kept the same. “Other things will not be the same. The data coming in will be the main factor in determining when interest rates are cut.”
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2024-05-01 09:03:17
www.nytimes.com
