Trump wants influence over Fed rates – here’s what history and the law say

Addressing a major grievance during his tenure as chairman, he criticized his own pick for Fed chairman Jerome Powell during a news conference on Thursday and said he could do Powell’s job better.

“I feel like the president should at least have a say there,” Trump said. “In my case, I’ve made a lot of money, I’ve been very successful, and I think I have a better instinct than, in many cases, people who would be at the Federal Reserve or the president.”

Trump’s comments were dismissed by some in the financial world, but other major players were quick to condemn the idea that the Fed should be less independent.

Former Treasury Secretary Larry Summers was among critics who said he was “horrified at how bad the idea was”. The president has other issues to worry about and is not as close to the economy as Fed leaders are, he added.

Meanwhile, Trump’s opponent, Vice President Kamala Harris, said Saturday that she would not interfere with the Fed if elected president.

The Fed’s history with presidential administrations

When the Fed was founded by the passage of the Federal Reserve Act in 1913, it was not very independent. The act made the Treasury secretary and the Comptroller of the Currency ex-officio members of the board, and the Treasury secretary presided over all Fed meetings at the time, wrote Stephen Slivinski, a former senior editor in the Federal Reserve’s research division. Bank of Richmond.

Even after the head of the Treasury and the Comptroller of the Currency were removed from the board by a 1935 amendment to the Federal Reserve Act, Congress and the executive branch either mandated or exerted strong influence over the Fed’s activities for decades, according to Slivinski.

It was only after an agreement between the Treasury Department and the Fed in 1951 that the central bank gained some independence. But that year, President Harry Truman also pressured then-Fed Chairman Thomas McCabe to resign, although Truman did not technically fire him.

The Fed faced another test from President Richard Nixon, who pressured then-Fed Chairman Arthur Burns to ease monetary policy to stimulate the economy before the 1972 election.

“I respect his independence. However, I hope that he will independently conclude that my views are the ones that should be followed,” Nixon said of Burns, as revealed by the infamous Nixon Tapes that led to his resignation.

Partly due to pressure from Nixon, inflation skyrocketed in the 1970s while economic growth slowed to create “stagflation” that lasted long after Nixon resigned in 1974. The oil shock of 1973 it also caused gas prices to rise and fueled more inflation. These economic headwinds were halted only by the sharp interest rate hikes of Burns’ successor, Paul Volcker.

Volcker is a prime example of why an independent Fed is needed, said Jamie Cox, managing partner for Harris Financial Group. A president controlling the Fed could mean that political motivations, such as re-election, could be staked above economic data.

“It could be used to enhance a president’s legacy, only to destroy the economy in the future,” he warned.

Instead, the Fed needs to float above the political fray to act quickly and ensure long-term prosperity for the economy, Cox added.

“When the Fed has to make decisions, whether it’s to conquer inflation, whether it’s dealing with a global pandemic, or dealing with a wave of deflation that could have turned into a crisis of credits and basically would have created a depression, it needs. to be able to do that without having to ask questions and ask for permission,” he said.

What does the law say?

Although Trump complains that he has no say in interest rates, the president has some influence over monetary policy, Cox said. The president appoints the chairman of the Federal Reserve, as well as other voting members, who must also be confirmed by the Senate.

More attention from lawmakers came after the Humphrey-Hawkins Full Employment Act of 1974, which amended the Federal Reserve Act, requiring the Fed chairman to appear before Congress twice a year to explain the monetary policy efforts of central bank and future prospects.

The Federal Reserve Act states that each member of the Fed’s board can be removed only “for cause.” There is no language in the act directly dealing with removing the Fed chair, but the position is considered a board member.

If a Trump-elect tried to fire Powell before his term expires in 2026, a lawsuit could send the issue to the Supreme Court, according to financial historian and legal expert Peter Conti-Brown of the Brookings Institution.

But Cox stressed that Trump has the ability to change the law with the help of a cooperative Congress.

“If the president and Congress together believe that some powers need to be changed, then they can do that, but it has to be a legislative process,” he said.