Trump may consider reshaping the Fed if elected – here’s what it could look like

A group of former officials and other allies of former President Donald Trump drafted a document Outlines proposed policy changes that would affect the Fed’s authority and independence. although it is Not sure Was Trump involved, some say he approved of s hard work. Trump has told his advisers that he prefers a low interest rate environment and Publicly blames central bank’s monetary policy decisions for economic problems, denounces Chairman Jerome Powell”political”.

Ironically, the document proposes changes that could make the Fed more vulnerable to political influence. For example, it suggests that the president should oversee federal funds rate decisionsalso has the power to demote Powell before the end of his term.

Politicians from both parties who value the Fed’s independence, including former Trump administration officials, have expressed concerns about the Fed’s independence. idea Allowing the White House to intervene in the Fed’s decision-making process and warning that if this move were to come to fruition, it would have dire consequences for the global economy. On the other hand, some Trump advisers believe it is unconstitutional for the Fed to operate without interference and that the Fed’s independence could lead to policy errors that would harm the U.S. economy.

it is Not sure Is it legally feasible to strip the Federal Reserve of its autonomy? Such a policy would face many institutional obstacles.Trump’s senior adviser says Policy recommendations should not be considered Official at this time. However, as the debate over the central bank’s optimal role heats up, it is important to understand the potential impact of limiting the Fed’s independence.

Why the Fed maintains its independence

Federal Reserve’s dual goals is a flexible measure to maintain maximum employment labor market factors, while also stabilizing the inflation rate at the target level of 2% per year.It achieves these two goals through monetary policy, primarily by adjusting the federal funds rate target, working hard anyone Encourage or limit economic growth and consumer demand.

Congress considers the Fed most effective in making monetary policy decisions alone Depending on the state of the economy, the central bank is structured as independent agency Make sure it is free from political pressure. reasoning go The federal government may have political motivations for keeping interest rates low in an election year, even though looser monetary policy won’t help the economy inside long.

The Fed is still responsible Congress is not independently audited, but its independence allows policy decisions to be made based on objective economic data. In addition, although the president appoints members of the Federal Reserve Board of Governors and their appointments are confirmed by the Senate, the president does not have the authority to remove governors due to policy disagreements.The terms of the Fed’s governors are also staggered for 14 years, making it difficult for the president to serve in office Radically reshape boards of directors according to their political preferences.

Historical evidence suggests that independent central banks are more successful in this regard Keep prices stable. study According to the International Monetary Fund, countries with independent central banks have lower inflation rates and better long-term economic outcomes.

However, credibility and accountability are critical to achieving these benefits.Some believe federal agencies operate with too much independence and Democracy and freedom from political influence require a balance between the two independent and accountability. For example, the Manhattan Institute advocate An overhaul of the Fed’s governance structure-one This increases White House oversight while also also Allow more Reserve Bank leaders to participate democratically in monetary policy decisions.

How Trump allies want to limit the Fed’s authority

Although Details of the plan Although the information is not available to the public, some of Trump’s advisers have discussed asking Fed governors to consult with the president on the agency’s rate-setting agenda. Others suggested Trump should Serve on the board of directors in an official capacityalthough some Trump allies called the idea far-fetched.

The paper also recommends requiring the Fed to undergo a formal review process when issuing new policies, similar to other government agencies within the Office of Management and Budget, and giving the Treasury Department more authority over emergency lending programs offered jointly with the Fed.

Trump’s ally groups are also working how Trump has the power to remove Jerome Powell as chairman if the former president is re-elected. this It may be necessary to demote Powell and replace him with another current board member, as the law clearly states The governor’s term cannot be shortened Short-lived due to policy differences.

Potential impact on mortgage rates and the global economy

While the political fallout from monetary policy may initially result in artificially low mortgage rates, some Trump advisers believe the plan could have negative consequences.

For example, lenders can directly respond to the prospect of uncontrolled inflation by setting Mortgage risk premiums are higherit is inferred that future interest payments during this period will decreased purchasing power. And if Investors take notice facts supported by the president By lowering interest rates amid high inflation, they may lose confidence in the Fed’s ability to respond to economic conditions. Their inflation expectations could lead to weaker demand for U.S. debt securities. The market will respond with higher Treasury yields, this will push mortgage interest rates higher.

if economic uncertainty caused by Long-term bond sell-offthe stock market will also fall. Investors may lose confidence in the country’s financial stability and become more averse to long-term investment commitments. REIT, which one particularly sensitive As Treasury yields change, their value will drop dramatically.

since The U.S. economy is the world’s largest and the U.S. stock market is a global benchmark. Losing confidence in U.S. financial stability could lead to global market volatility.International investors may exit the U.S. market This will further reduce stock price.

this does not mean that reform The Fed would not exist without global financial chaos.But any changes in Fed governance need Ensure confidence that the institution is free from political interference.Congress has Reshaping the Fed This has happened many times throughout history, but often legislative action was taken to provide the agency with more autonomy.

However, former President Richard Nixon appointed Arthur Burns to lead the Federal Reserve from 1970 to 1978a more cooperative relationship ensues. burns He is accused The Fed’s policy decisions depend on the president’s preferences, and most economists believe The added influence of the White House led to a painful period of high inflation that negatively impacted the economy for years. So, with history as a guide, markets are likely to react to any Fed reforms that could lead to a repeat of Burns’ situation.

It is possible that Congress could make changes that would increase the Fed’s responsibilities without leaving the agency vulnerable to political influence and sparking economic strife.For example, some advocates of reform within the Federal Reserve respected Require actual Fed governors have experience in financial markets and allow all Reserve Bank presidents to participate in every budget and monetary policy decision. Other recommendations include eliminating the maximum employment mandate and eliminating conflicts of interest, such as limiting the Fed’s investment portfolio to Treasuries and prohibiting the central bank from issuing and enforcing regulations.

The purpose of these proposed changes is to Increase the Fed’s accountability and reduce political interference. However, the president is allowed to influence Fed decisions directly would incur huge political pressure. As a result, the draft document has raised concerns, even among Trump administration officials.

Ian Katz, director of research advisory firm Capital Alpha Partners, explained The advice from Trump allies will have a huge impact on markets, he said: “There are a lot of people in the market who want to see Trump serve as president again. I do not think so have there are many people in the market World Health Organization Hope to see Trump become the de facto Fed Chairman.

bottom line

Trump is not the first president to blame the Federal Reserve for the nation’s economic problems. central bank independence Making it a convenient scapegoat. The Fed has made policy mistakes historically, and many believe those mistakes have harmed the economy, so it is reasonable for the government to question the Fed’s policies. The agency’s governing rules.

Ultimately, it’s just an additional issue that voters will have to weigh when they go to the polls this November.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.