Can Trump influence the Federal Reserve and lower interest rates?
President-elect Donald Trump plans to retake the White House with a series of bold promises, including: lower interest rates.
American households have been frustrated by two years of high borrowing costs. But the president does not have the power to lower mortgage rates, the annual percentage rate on credit cards, or business loan rates. Interest rates are the result of a combination of economic factors, including the Federal Reserve’s monetary policy.
The Fed – the country’s central bank – began gradually lowering its interest rate during the fall. The Fed’s main decision-making body will meet again next week, with another expected quarter-percent cut on the agenda.
While Trump will have the power to appoint a new Fed chairman in 2026, he will not have the ability to set monetary policy or directly change the federal funds rate.
There is a long history of presidents trying to interfere with central bank autonomy. During his first presidency, Trump threatened to oust Fed Chairman Jerome Powell after the Fed started raising rates. More recently, the president-elect said he will not seek to fire Powell before the end of the Fed chair’s term in 2026.
Here’s a look at what Trump can and can’t do regarding interest rates and the Fed.
Who determines the interest rate?
The Federal Reserve sets the Federal Funds Rate, a benchmark interest rate that banks pay to borrow money. This target interest rate range indirectly affects the short-term rates that banks and lenders will later charge their customers on everything from credit cards to home and car loans.
The Fed cuts and raises its benchmark interest rate to keep prices relatively stable (with an ideal annual inflation rate of 2%) and unemployment low, the US central bank said. Peter C. Earle, a senior economist at the American Institute for Economic Research.
To understand how this works in practice, think back to the early days of the COVID-19 pandemic. When the economy collapsed in 2020, the Fed cut interest rates to zerohoping to encourage spending and investment at a time when people and businesses would otherwise be hesitant. When the economy rebounded two years later, the Fed raised rates to address rapid inflation.
What is the relationship between the Fed and the government?
The Federal Reserve was created by Congress in 1913 with the Federal Reserve Act. Congress can amend the law to change the way the Fed operates.
The president’s most important relationship with the Fed is through his power to appoint the Fed chairman and other board members. Presidents often appoint Fed board members who align with their worldview. However, the appointments are staggered so that no one president has the power to completely overhaul the Fed, said Sarah Binder, a professor of political science at George Washington University.
In theory, Trump could push for changes to the Federal Reserve Act through a Republican-controlled Congress. However, Binder said any change to the rules governing the Fed would require a bipartisan coalition of 60 votes to pass the Senate.
What the president can do | What the president can’t do |
Appoint a new Fed chairman in 2026 (and appoint Fed board members at large when their terms expire) | Fire the Fed chairman over simple disagreements. Fed seats can only be removed “for cause,” such as misconduct or malfeasance. |
Express your concerns about monetary policy by publicly criticizing the Fed’s actions. | Directly set the interest rates for the country or for banking institutions. |
What power does Trump have over the Federal Reserve?
In 2018, during his first administration, Trump appointed current Fed Chairman Jerome Powell. Two years later, Trump called him the ‘enemy’Powell’s term ends in 2026, and the president likely won’t have the power to remove Powell before then. When asked in early November whether the president could fire or demote the Fed chairman or other Fed governors, Powell replied, “Not allowed under law.”
According to Earle, members of the Federal Reserve Board can only be removed from office “for cause,” which amounts to proven misconduct, malfeasance or inability to perform their duties due to illness. Simple disagreements over policy or presidential frustration over interest rates are not enough by themselves. “Those are not valid grounds for removal,” Earle said.
Presidents have another, albeit unofficial, power over the Fed: the pulpit. Some presidents have been known to rail against the Fed when the economy is bad, pressuring them to take some action. Trump himself did this during his first term by threatening to oust the Fed chairman when the economy nearly collapsed in March 2020. Experts agree that Trump is likely to make these types of comments again.
“I don’t think anyone expects presidents, especially in this day and age, to tie their hands completely behind their backs,” Binder said.
Is the Fed really impartial and independent?
In theory the Fed is independent, but in practice this is not always the case. According to Earle, it is almost impossible for an entity as important as the Fed to be completely above politics.
The Fed has several structures that insulate it from outside influences: long terms for board members, staggered appointment terms and projections of dismissals for cause, for example. These all serve to give the Fed some autonomy and protect it from the whims of political leaders.
But ultimately, the Fed operates in the middle of the political system. “It can’t be hermetically sealed,” Binder said.
How will Trump’s policies impact future interest rate cuts?
Experts say it is unlikely that Trump’s broader economic policies would lead to faster or deeper rate cuts. In fact, they can have the opposite effect.
Trump’s proposals for tariffs on foreign imports are likely to lead to more inflation, which could then influence the Fed to raise rates again, as it often does to combat inflation, he said. Daan Bakkera senior economist at the Center for Economic Policy and Research.
But experts say Trump’s biggest impact may be the sheer uncertainty he creates, which could roil financial markets. His bold policy statements often confuse policymakers, who are unsure exactly what direction he might take. Trump’s threats to fire Powell, regardless of whether he follows through (or can), only adds instability to the mix.
