Could Donald Trump Break the Fed?

Mainstream economists hold sacred the notion that central banks must be shielded from political influence. The U.S. Federal Reserve’s fundamental job is to set interest rates at the optimal level to keep employment high and inflation low. This often requires inflicting short-term pain—such as steeper borrowing costs or temporarily higher unemployment—to avoid even more disastrous outcomes in the long term. Elected officials, the thinking goes, don’t have that kind of patience. With an eye on the next election, they’re liable to keep rates artificially low to juice the economy today at the risk of sending prices spiraling tomorrow. In the worst-case scenarios, such as in contemporary Venezuela, politicians might order the bank to print money to fund spending, leading to hyperinflation.

Central-bank independence is not sacred to Donald Trump. During his four years in the White House, he tried and failed to bend the Federal Reserve to his will. He apparently hasn’t given up on the idea. A few weeks ago, he told reporters that he “strongly” felt that presidents should have “at least a say” over the central bank’s policy decisions—shattering a modern taboo against presidential involvement in Fed policy making.

Trump later tried to walk back that comment in an interview with Bloomberg, but his long track record leaves little room to doubt his real views. His first effort to usurp the Fed’s independence ran aground when the Senate narrowly refused to confirm a slate of his preferred yes-men to lead the institution. A second Trump presidency, however, would very likely be accompanied by a more accommodating Republican Senate majority. If Trump wins in November, we may learn the hard way just how important Fed independence was all along.

The Fed has a few built-in institutional features designed to protect its autonomy. The seven members of its board of governors are appointed by the president, but each receives a 14-year term. The all-important interest-rate-setting committee includes both the board of governors and a rotating cast of regional Federal Reserve bank presidents, who are each selected by representatives of their local business community and civic groups rather than by the White House.

Even with those safeguards in place, presidents have tried to meddle. Lyndon Johnson once shoved Fed Chair William McChesney Martin up against a wall during a particularly heated argument over monetary policy. Ronald Reagan publicly groused about some of Paul Volcker’s moves, and once summoned him to a private meeting where Chief of Staff James Baker ordered the chair not to raise rates prior to the 1984 election. (Volcker wrote in his memoir that he wasn’t planning to anyway.) George H. W. Bush called on Alan Greenspan to lower rates in a New York Times interview. Most notoriously, Richard Nixon successfully pressured Fed Chair Arthur Burns to loosen up the money supply in the lead-up to Nixon’s 1972 reelection campaign, helping fan that decade’s inflation.

[Rogé Karma: The Federal Reserve’s little secret]

Bill Clinton ushered in an era of heightened deference to the Fed. Under the encouragement of economic advisers, including Treasury Secretary Robert Rubin, Clinton adopted the policy that presidents shouldn’t even comment about the central bank’s decisions. George W. Bush and Barack Obama largely followed the same standard.

Trump jettisoned it. Starting in 2018, when the Fed began raising rates to the still historically low level of 2.4 percent, he waged a one-sided public feud with the central bank unlike any seen before. He accused Fed officials of “going wild” and “loco” with interest-rate hikes, which he blamed for slowing growth and tanking stocks. He tweeted that Jerome Powell, whom he had appointed as Fed chair, was an “enemy” of America on par with Chinese leader Xi Jinping, and reportedly mused in private about trying to fire him.

Trump’s first round of Fed nominations had consisted of relatively moderate, mainline Republicans out of central casting. As his anger at Powell grew, he changed tack and began trying to push through transparently partisan loyalists. He first floated Herman Cain, the Trump campaign surrogate and former presidential candidate known for his gimmicky 9-9-9 tax plan. Cain eventually withdrew from consideration in the face of opposition from Republican senators after the press resurfaced a long history of sexual-misconduct allegations against him. Next came Stephen Moore, the supply-side economics maven and Trump adviser, who suddenly began echoing the president’s calls for rate cuts after having spent years calling for tighter policies under Obama. Republicans seemed largely comfortable with Moore’s qualifications, but his nomination collapsed thanks to his long history of publishing sexist jokes, as well as problems with his taxes and child-support payments.

Finally, there was Judy Shelton, another longtime supply-side think-tanker known for holding fringe positions including support of the gold standard and opposition to federal deposit insurance. Shelton had also long called for tighter money before changing her tune and advocating for aggressive rate cuts under Trump (sometimes during interviews conducted from his hotel in Washington). She eventually seemed to say the quiet part out loud in a Wall Street Journal op-ed that argued the Fed should “pursue a more coordinated relationship with both Congress and the president.”

Economists reacted in abject horror to Shelton’s nomination; more than 100 of them, including seven Nobel laureates, signed an open letter opposing her selection, in which they accused her of calling “for subordination of the Fed’s policies to the White House—at least as long as the White House is occupied by a president who agrees with her political views.”

Shelton’s bid was defeated—but only by a razor-thin vote that required then-Senator Kamala Harris to make a last-minute train ride back to Washington. Among Shelton’s supporters were John Kennedy of Louisiana and Kevin Cramer of North Dakota: Republican senators who generally pay lip service to the importance of Fed independence. One of her three Republican opponents, Utah Senator Mitt Romney, is retiring after the current Congress. If Republicans retake the Senate this election, it will be with an even more MAGA-friendly class of lawmakers, and Trump will have an easier time appointing a loyal partisan.

Fed governors by law can only be removed “for cause,” and there are just two vacancies scheduled on the board of governors by the end of 2028. One of those, however, is Powell; selecting his replacement would give Trump the chance to put his stamp on the institution. The Fed chair is the public face of the board and exercises enormous soft power over its decision making. And more vacancies could very well arise. It is extremely rare for Fed governors to serve their full term; the median stint is a mere five years. With a few early retirements, Trump could have an opportunity to substantially reshape the character of the central bank.

As Adam Posen, president of the Peterson Institute for International Economics, put it to me: “You appoint one nutcase, you can get around it. You appoint more than one, and you appoint them to the top jobs, then that’s different.”

A small-d democratic case can be made against Fed independence. Voters tend to hold the president responsible for the economy, and interest rates are the closest thing that the economy has to a steering wheel. The idea of handing that wheel to an insulated, technocratic institution like the Fed and leaving the president to take the blame for any failures strikes some as fundamentally unjust. It “is actually true that a weird, secretive, and unaccountable institution runs our society,” the left-leaning antitrust crusader Matt Stoller wrote last year in The American Prospect. The Republican vice-presidential nominee, J. D. Vance, made his own version of that case recently as he defended his running mate’s comments.

“President Trump is saying something that’s really important and actually profound,” he told CNN. “You have so many bureaucrats making so many important decisions. If the American people don’t like our interest-rate policy, they should elect somebody different to change that policy. Nothing should be above democratic debate in this country.”

[David A. Graham: The fakest populism you ever saw]

That’s a reasonably coherent philosophical argument for giving presidents more hands-on control of monetary decisions, even if the result might be worse policy. But if Trump were to start appointing partisan yes-men, the risk isn’t just that they’d keep rates low to appease him. It’s that those same picks might also try to weaponize policy to undermine a future Democratic president. And in a polarized political environment, even genuine policy disagreements could be interpreted as political gamesmanship that would chip away the market’s faith in the Fed’s ability to manage the economy soundly.

It would also create a dangerous precedent. Even if Trump can appoint only one or two loyalists to the Fed, his doing so would break the norm that monetary policy should be something of a nonpartisan exercise and set the stage for both parties to try to install more reliable lackeys in the future. In that sense, even just one nutcase might matter quite a bit.