The proposal risks focusing on short-term growth over economic health.
Former President Donald Trump recently said the president should have a role in setting interest rates that determine costs for everything from mortgages to credit card loans.
The proposal would mark a major shift from the longstanding norm of political independence at the Federal Reserve, which currently retains control over interest rate policy. The nation’s central bank is in the midst of a yearslong fight to dial back inflation.
“I feel the president should have at least [a] say in there,” Trump said during a press conference at his Mar-a-Lago resort in Florida last week. “I feel that strongly. I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
The policy idea elicited opposition from both liberal and conservative economists who spoke to ABC News.
They warned that any president, including Trump, would likely seek low interest rates in an effort to improve the nation’s short-term economic growth. That approach would risk runaway inflation that could wreak significant economic damage long after a given president has left office, they added.
“It’s an absolutely bad idea,” George Selgin, senior fellow and director emeritus of the Center for Monetary and Financial Alternatives at the libertarian Cato Institute, told ABC News.
“Presidents are known to be very shortsighted when it comes to monetary policy,” Selgin added. “They’re happy to try and take advantage of a temporary boost that easy money can give to economic activity and downplay or overlook the longer-run consequences, which can include inflation getting out of control.”
Paul Wachtel, a professor of economics at New York University who studies monetary policy, echoed that rebuke.
“I can’t think of anything that economists across the spectrum agree upon more than the importance of central bank independence,” Wachtel told ABC News.
In response to a request for comment from the Trump campaign, a representative of the Republican National Committee (RNC) faulted the Biden administration for a rise in inflation in recent years that prompted the Fed to raise interest rates.
“The president’s policies already affect interest rates — the failed Harris-Biden economic agenda has led to the fastest increase in mortgage rates since 1981,” RNC spokesperson Anna Kelly told ABC News. “As the deciding vote on the so-called ‘Inflation Reduction Act’ that actually spiked prices and made housing unaffordable for families across the country, Kamala Harris co-owns the disastrous impact of Bidenomics, and no one can afford another four years.”
The proposal from Trump arrives at a time when the Fed has held interest rates at their highest level in more than two decades. The central bank has helped bring inflation down significantly from its peak, but elevated interest rates risk tipping the U.S. into a recession.
Scrutiny over the Fed’s role in a potential economic downturn reached a fever pitch earlier this month when a weaker-than-expected jobs report showed that the economy may be slowing faster than previously known.
“It’s one of those occasions when people can second-guess the Fed and wonder whether Trump would’ve made a better decision, but one can’t just base a decision on who should govern monetary policy on a single event,” said Selgin.
Critics of an expanded role for the president point to a bout of high inflation in the 1970s and 1980s. Before the inflation took hold, President Richard Nixon had urged Fed Chair Arthur Burns to cut rates in the run-up to the 1972 presidential election.
Nixon’s advocacy is widely viewed as a contributing factor for lower-than-necessary interest rates that enabled inflation to get out of control, Mark Zandi, chief economist at Moody’s Analytics, told ABC News.
“Allowing the president, any president, to help set monetary policy would eventually wreck the U.S. economy,” Zandi said.
To be sure, the Fed does retain direct ties to the federal government. The Fed chair is appointed to a four-year term by the president and must receive confirmation from the Senate. Further, the general guidelines for interest rate policy are rooted in legislation approved by Congress.
Selgin, of the Cato Institute, acknowledged that the Fed doesn’t retain full political independence.
“The Fed’s independence is far from absolute,” Selgin said. “Precisely because it’s so limited, it’s important to keep as much of that independence as exists.”
Vice President Kamala Harris, the Democratic presidential nominee, said on Friday that she disagreed with the proposal voiced by Trump.
“The Fed is an independent entity and as president I would never interfere in the decisions that the Fed makes,” Harris told reporters in Phoenix, Arizona.
The Fed is guided by a dual mandate to keep inflation under control and maximize employment. In theory, low interest rates help stimulate economic activity and boost employment; high interest rates slow economic performance and ease inflation.
The chances of an interest rate cut at the Fed’s next meeting in September are all but certain, according to the CME FedWatch Tool, a measure of market sentiment. Market observers are split roughly down the middle about whether the Fed will impose its typical cut of a quarter of a percentage point or opt for a larger half-point cut.
An interest rate cut in September would arrive during the final months of the presidential campaign.
Last month, Fed Chair Jerome Powell said coming rate decisions would depend solely on economic conditions.
“Congress has, we believe, ordered us to conduct our business in a nonpolitical way at all times, not just some of the time,” Powell said at a press conference in Washington, D.C., last month.
“We never use our tools to support or oppose a political party, a politician, or any political outcome. The bottom line is, if we do our very best to do our part and we stick to our part, that will benefit all Americans,” Powell added.
Source: abcNEWS
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