Can Trump’s administration influence interest rates?

Trump’s administration has been criticized for potentially meddling with the Fed’s decisions about the US monetary policy. However, there is little Trump could do to threaten the Fed’s independence. Trump and some of his allies have suggested that Trump should be allowed to comment on interest rates, but this would likely not be possible in the short term. The Fed is an independent institution meant to make decisions that shape the domestic economy without political interference.

Trump can’t influence the Fed much for now. When it comes to interest rates, Trump can complain they are too high or too low like any other American. However, the Fed’s leaders are the only government officials with the power to adjust those rates. The Fed has lowered interest rates this year as inflation has declined but kept rates fairly high for the last few years, in part to fight pandemic-era inflation. Even with the lower rates, many Americans are still finding it too expensive to borrow money so they can make big purchases like a home.

Forcing or pressuring the Fed to lower interest rates won’t necessarily fix high borrowing costs for Americans; the interest rates set by the Fed are actually short-term costs that banks pay to each other to borrow money. There are many other factors that go into consumer credit. Trump’s other policy proposals, such as broad tariffs or mass deportation, could increase inflation, which higher interest rates are supposed to combat. If implemented, these proposals could lead to higher inflation.

One way Trump might try to meddle in the Fed’s affairs is by trying to fire Fed Chair Jerome Powell. Trump appointed Powell but was highly critical of his decision-making during his first term. Powell has stated that he will serve through the rest of his term, which doesn’t end until 2026, but has declined to say whether or not he would stay on for a third term.

Legally, Trump cannot force Powell to resign or fire him. Members of the Fed’s Board of Governors, which Powell is part of as the Fed chair, can only be fired for wrongdoing or job performance reasons, not differences in policy. Trump could try to fire Powell claiming he’s performing poorly, but that decision would probably embroil the president-elect in a drawn-out legal battle.

Because the Fed was created by an act of Congress, it would take Congressional action to make any changes to how it works. There’s no signal right now that most lawmakers are willing to challenge the independence of the institution. Any attempts to interfere with the Fed’s independence could have ripple effects in the stock market.