How Trump's wish for more Federal Reserve control could impact economy if he's reelected

Former President Donald Trump says he wants a more direct role in how the Federal Reserve sets interest rates and suggested he could break with traditional policies when it comes to the Fed’s independence. Geoff Bennett discussed what Trump could do if elected and the reverberations with Krishna Guha of Evercore ISI and former executive vice president at the New York Fed.

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Geoff Bennett: Former President Donald Trump says he wants a more direct role in how the Federal Reserve sets interest rates and suggests that he could break with traditional policies when it comes to the Fed’s independence.

Trump has been critical of Fed Chair Jerome Powell, dating back to his own presidency because of Powell’s approach to interest rates. And during his press event at Mar-a-Lago last week, Mr. Trump made it clear he wants a change.

Donald Trump, Former President of the United States (R) and Current U.S. Presidential Candidate: I feel the president should have at least say in there. Yes, I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.

Geoff Bennett: Meantime, Vice President Kamala Harris told reporters this weekend she couldn’t disagree more strongly.

Kamala Harris, Vice President of the United States (D) and U.S. Presidential Candidate: The Fed is an independent entity. And, as president, I would never interfere in the decisions that the Fed makes.

Geoff Bennett: Powell’s tenure as Fed chair does not end until May 2026, and that begs the question, what could President Trump try to do if he is reelected, and what impact might that have?

We get some insight now from Krishna Guha, vice chairman of Evercore ISI and former executive vice president at the New York Fed.

Thanks for being with us.

Krishna Guha, Former Executive Vice President, Federal Reserve Bank of New York: Any time.

Geoff Bennett: So, first, let’s start with a bit of a reality check. How feasible is it for Donald Trump to fundamentally change the autonomy of the Fed and change the relationship between the Federal Reserve and the president if he is reelected?

Krishna Guha: Well, it’s complicated.

So, first off, for President Trump, if reelected, could certainly let his views on monetary policy be known loudly and including through social media and other nonconventional channels. He could try to do what’s called jawboning, leaning on the Fed in public to take certain actions on interest rates.

Actually changing the institutional independence of the Fed, that’s more challenging. The Fed’s independence is enshrined in the act of Congress the Federal Reserve Act, and that makes the chairman, for instance, removable as generally understood, only for a cause, which would mean something pretty extreme to make him unfit for office.

The president can’t simply appoint additional members to the Federal Reserve Board. He’d have to wait until vacancies became available and those only become available very slowly. So it would be tough. Now, there is one complication, and that is that it is somewhat unsettled as to what the exact legal status of the Fed chair is and whether the president might have some legal grounds for being able to dismiss a Fed chair.

That’s not something that I think any mainstream lawyer or central banker believes is right, but it hasn’t been fully tested in the courts. And so there’s some outside possibility that the president could attempt to assert an authority over the Fed chair that has not been understood to be there.

Geoff Bennett: If we look to other countries or look back in this country’s own history, what does it tell us? Does a Central Bank that remains independent from political influence, does that yield better monetary policy and better macroeconomic decision-making?

Krishna Guha: There’s just very, very strong evidence from the U.S. itself and from countries around the world that independent central banks tend to achieve better economic outcomes.

And that ultimately doesn’t just benefit society, doesn’t just benefit the economy. It, in the end, tends to benefit the president as well. And so I think there’s actually a lot of good reason why it would be not to try to assault the independence of the Central Bank.

Geoff Bennett: Critics have blasted the Fed for being too slow to respond to inflation. And there will certainly be folks who say, why is it such a bad thing to have the Fed accountable to someone, accountable to the executive branch?

Krishna Guha: So, you raise a really important issue there, Fed accountability.

Now, Fed officials past and present will say, absolutely, the Fed must be accountable. But under our system of government, the Fed is accountable to Congress, not the executive branch. The Fed is a creature of Congress. The Fed chair goes to Congress to testify. He’s grilled by members of the Senate. He’s grilled by members of the House.

That is the way that our system of accountability is set up. And it’s the way that it’s worked very well in recent decades. That doesn’t mean that the Fed is always going to get everything right. Of course not. The issue is simply, would you have more confidence that the Fed would get things about right most of the time if it was more insulated from short-term political pressures, or do you think that political pressures are going to make them do a better job?

I think most people have a pretty intuitive grasp of what the answer to that question would be.

Geoff Bennett: Well, I will put that question to you. I mean, would the Fed do a better job with it was more susceptible to political pressure?

Krishna Guha: Absolutely not.

But, if I may, I’d like to explain why. So the public knows that politicians in general, most of the time, like low interest rates. They want interest rates to be low because that will support growth, it’ll support jobs, it’ll make them popular because people’s borrowing costs are low.

And they probably will be happy with that, even if it meant a bit more inflation, particularly if they have got a lot of debt, because you can inflate some of that debt away. So if you have a Central Bank that looks like it’s losing its independence, people start to wonder, will we get a little bit more inflation over time?

And when they start to think that way, they start to think, well, maybe I should put up my own prices a bit more. Maybe I should ask for a bigger raise on my wages. And those type of pressures actually make inflation itself tend to go upwards.

So, to deal with that, the Central Bank, if it is able to take action, can just say, OK, well, then we will move rates up further to try to keep things under control. But you end up with a worse combination of inflation and interest rates than if you just leave the Central Bank alone, and people can trust it to do its best effort at getting the job right without bending to political pressure.

Geoff Bennett: Krishna Guha, thanks so much for adding some much-needed context to this issue. We appreciate it.

Krishna Guha: Any time. Thank you.