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A second Trump administration might be very different from the first, and that includes how the president treats the Federal Reserve. Donald Trump complained a lot about the Fed when he was president, jawboning for lower interest rates and questioning its competence. Yet at the end of the day the Fed retained its independence and credibility. Now all that is in danger.
Trump advisers have been drafting plans to limit significantly the operating autonomy of the Fed. The Trump campaign has disavowed these plans, but the general ideas have been spreading in Republican circles, as evidenced by the Heritage Foundation’s Project 2025 report. Trump himself has called for a weaker dollar policy, which could not be carried out without some degree of Fed cooperation. As a former businessman and real-estate developer, Trump seems to care most about interest rates, banking and currencies.
One concrete proposal reported in the Wall Street Journal would require the Fed to informally consult with the president on decisions concerning interest rates and other major aspects of monetary policy. That would make it harder for the central bank to commit to a stated policy of disinflation, since the ongoing influence of the president would be a wild card in the decision. Presidents would likely give more consideration to their own reelection prospects than to the advice of the Fed staff. Further confusion would result from the reality that the responsibility of the president in these matters simply would not be clear.
It’s important not to be naïve: Regardless of who is in the White House, the Fed already cares what the president and Congress think, as its future independence is never guaranteed. Still, explicit consultation would undercut the coherence of the decisionmaking process within the Fed itself and send a negative signal to investors. There is no upside from this approach.
It’s also true that there are countries where the government, not the central bank, steers monetary policy. In New Zealand, the government establishes an inflation target and the Reserve Bank of New Zealand is expected to meet it or explain why it failed. This way the legislature (which is closely allied with the executive branch, unlike in the U.S.) has to take responsibility for the inflation rate. Although this method has worked for New Zealand, it is impracticable for the U.S., due to the extreme separation of powers in the U.S. government. The new Republican proposals, in contrast to the Kiwi emphasis on clear lines of governance, seek behind-the-scenes influence without accountability for the executive branch.
If Trump wins, America’s best hope is that the administration itself reconsiders these plans and rejects them. (Congress could also force him to reconsider his Fed choices, as it did in his first term.) One reason the current semi-independent Fed is useful is that it allows the president — and, more important, Congress — to shift blame for tough monetary-policy decisions. House members, who face re-election every two years, benefit from this arrangement most of all. So if a Trump election is accompanied by a Republican House, a plausible but by no means certain outcome, the Republican Party itself may not want to restrict Fed independence. The whipping boy would be gone.
