The Wall Street Journal reported this week that Donald Trump has designs on the Federal Reserve should he win this November’s election. Although the Fed answers to Congress and has its board members selected by the president, it nonetheless acts independently. Trump, it appears, would like to change that, and is considering ways he might gain more influence over its policy.

The why of this seems more obvious than the how. Why wouldn’t a government leader want the central bank to underwrite its spending decisions with cheap credit? Politicians everywhere grow exasperated with central bankers whose policies frustrate their plans — as UK Chancellor Jeremy Hunt, whose call for lower interest rates ahead of an imminent election is running smack into a stubborn Bank of England, has found.

But how Trump might bend the Fed to his will is less clear. Its governance isn’t in his gift. The Federal Open Markets Committee, which sets interest rates, comprises the Fed’s seven governors and the presidents of the 12 regional reserve banks. Of these, the president chooses the seven governors (which includes the chairman), subject to Senate approval. However, given that they serve 14-year terms, and have their appointments staggered every two years, any presidential term only includes two appointments.

So he couldn’t do much to change the Committee’s composition. What’s more, because Committee decisions aren’t subject to ratification by the executive, he couldn’t dictate monetary policy either. But what Trump could do, given his track record of stirring up his followers, is make enemies of governors who don’t do his bidding, in the hopes they might then prove a little less resistant to his wishes.

This isn’t unprecedented. To a considerable degree, the independence of central banks is a function not of law but of practice. Politicians are expected to remain silent on the direction of monetary policy, restricting their focus to the fiscal realm of taxing and spending. However, politicians can and sometimes do stray over these lines to make life difficult for their central banks. When he was president, Richard Nixon was able to pressure his Fed chairman, Arthur Burns, to align central-bank policies with his preferences.

Ever since, given the received wisdom that Burns was a failed chairman, his successors have fought to preserve their independence. But one can easily picture a situation in which Trump, energised by a new mandate, could bully Fed governors into not going against “the people’s will”. And this leads into the what question — what might result from the Fed aligning its policies with the fiscal plans of a second Trump administration?

If history is any guide, the impact would be inflationary. As the government opened the taps — boosting spending while cutting taxes — and the Fed allowed it to continue borrowing cheaply to fund its resulting deficit, both the economy and stock markets would be likely to boom. In the short term, Trump might look like a genius. But inflation would almost certainly rise, as it did under Burns and Nixon. The big question would then become whether Trump managed to complete his term before the crash, or whether he ended up having to carry the blame.

But if that prospect looks unpleasant, the alternative might be even worse. Given the size of the US’s fiscal deficit and its current debt dynamics, it seems inevitable that whoever wins the election will be forced by the Fed to eventually implement some kind of fiscal retrenchment. Trying to create a supine Fed so as to allow the good times to continue may thus prove as irresistible as it would be unwise.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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