J.D. Vance and Donald Trump reiterate their insistence that baseline interest rate policy should be based on political mandates.
The Federal Reserve was created as an independent entity—in theory—more than a century ago. Historically, presidents from both parties have agreed to maintain the Fed’s independence.
But Republican candidates for the 2024 elections are determined to bring the issue back to the negotiating table.
Former President Trump raised eyebrows during his campaign when he hinted obliquely at when he wanted Federal Reserve Chairman Jerome Powell to cut the benchmark interest rate. The hints suggested that the president’s tenure could be at stake if Powell’s decision is not in Trump’s favor.
Trump’s running mate, Senator Vance of Ohio, has backed the call, arguing that monetary policy — which includes interest rates — should be “fundamentally a political decision.”
This will be-Even by Vance’s own admission- it represents a major departure from the norm.
The Fed’s independence is no accident: The organization was specifically designed to be nonpartisan in order to ensure long-term economic stability, without being pressured into making political decisions by an administration looking for a win to brag about.
Many White House occupants have tried to influence the Fed or question its independence, but their attempts have often failed. Tensions between the Fed’s board and the Oval Office were perhaps at their worst during the Nixon administration. This is also a proposal that has been repeatedly criticized by economists, Wall Street analysts, and former Fed members. And fellow politicians.
Until this year, the independence of the Fed was a non-issue because of widespread agreement on both the left and the right that subordinating the Fed to the interests of the president was simply unpredictable. Which hasn’t worked out well in the past.
But in an interview with CNN “Whether we agree or disagree, America’s elected leaders should have a say in the most important decisions facing the country,” Vance said in remarks Sunday.
“It would be a huge change, but whether the country goes to war, what our interest rates are, these are important questions that American democracy has to have important answers to, and I think all President Trump is saying is, ‘Look, it’s weird that you have so many bureaucrats making so many important decisions. ’”
While Vance sees Trump’s comments as reflecting his commitment to democracy, Trump himself has simply said the president should have more influence over the Fed.
Late last week, Trump said he should have a say because he “made a lot of money” and had “better instincts” than Powell.
Vance’s position that the Fed is not political enough It also conflicts with criticism from his potential chairman, who has complained that the Fed also political.
Powell has been careful to distance himself from the discussion. “We are an apolitical agency,” he said earlier this month. “We don’t want to be involved in politics in any way.”
Deviation from the global norm
Around the world, interest rates are largely set by independent central banks, usually with the aim of controlling inflation and/or maximizing employment. For example, each of the G7 countries has an independent body that sets the policy interest rate.
But Vance seemed keen to break with tradition: “If the American people don’t like our interest rate policy, they should elect someone different to change it,” he said.
The danger of changing interest rates through elections is that during a period of inflation, with prices rising, the public may refuse to vote to make the cost of money more expensive by raising the interest rate, even though doing so is a necessary evil to rebalance supply and demand and lower prices overall.
“Nothing should be above democratic debate in this country when it comes to the big questions facing the United States,” Vance said.
It’s not clear how Trump and Vance will change the Fed’s relationship with the White House or how closely they will be linked. Representatives for Trump’s office did not respond to a request for comment. wealth Request comment.
Why is the independence of the Federal Reserve so important?
The Fed is not “above” democratic debate—its chairman is elected by the president—but its actions are determined by an independent panel of economists from across the United States.
As Donald Kohn, a former Fed vice chair, told Goldman Sachs in a 2019 research paper: “It is critical to have a group of people who analyze the economy in terms of long-term economic policy objectives… Politicians have a much shorter time frame in mind than is consistent with achieving those objectives.”
In a note he reviewed luck “Politicians look at the next election and their motivation is to step on the gas pedal as much as they can to maximize their chances of winning the next election, and then worry about the consequences later,” he explained.
“The elected representatives were very wise to recognize their potential weaknesses and create an independent central bank with a longer-term perspective on policymaking.”
Tyler Cowan, professor of economics at George Mason University, says in an article: Bloomberg Opinion ColumnHe says the Fed could take more responsibility for its decisions through an executive branch review process, as is the case for the Social Security Administration and the Securities and Exchange Commission.
“At the very least, the executive branch could set such a budget and fight for it. If the president—Trump or not—does so, it will be a sign that he is serious about monetary stability. Otherwise, it is safe to assume that any Fed plans, however implausible, are just another clumsy power grab,” Cowan wrote.
The White House He also published an analysis on the importance of the Fed remaining an independent entity, and in May of this year, the White House announced a new action plan. Council of Economic Advisers wrote“The credibility of the Central Bank is enhanced by its independence, This credibility is also essential to maintaining solid long-term expectations.
“When credibility is undermined by political influence, people, businesses, and others who set prices become less inclined to believe the central bank’s commitment to lower inflation, which in turn can lead to higher inflation.”
For their part, Wall Street analysts have not yet lost faith in the Fed’s credibility, according to Paul Donovan, chief economist at UBS Global Wealth Management.
On Friday, Donovan said: “It may be possible that markets are choosing not to price in the risk of undermining the Fed’s independence. Investors appear to have tended to dismiss Trump’s more extreme economic policies as a case of the former president’s lack of seriousness.”
“If there is evidence that Trump is serious about these policies, markets are likely to react.”