According to an economist who examined the president’s tweets about the Fed during his first term, President Donald Trump is unlikely to carry out his threat to fire Federal Reserve Chairman Jerome Powell, but the pressure from his public campaign for lower interest rates will still influence the central bank’s decisions.
Following Trump’s comments this week, Francesco Bianchi, a professor of economics at Johns Hopkins University, told MarketWatch that the Fed now understands it will be held accountable in the public eye if there is a recession.
“People are going to say – not just Trump, and that’s the key thing – that the Fed should have cut rates,” Bianchi stated.
“The shift in public opinion that the Fed is to blame if something goes wrong could potentially influence the Fed’s actual course of action,” the author said. Bianchi continued, “It’s an indirect link; it’s not like they follow the president’s orders.”
The Fed and the market are currently at odds about the interest rate forecast. Derivative market traders anticipate a 100 basis point rate drop from the central bank this year due to concerns about a severe economic slump.
However, Fed Chairman Powell stated that the Fed’s efforts to battle a weak economy are hampered by the anticipated spike in inflation brought on by the high Trump tariffs. These days, a lot of Fed observers don’t anticipate any reduction until the year’s last three months.
Trump’s resentment of the central bank was triggered by Powell’s hawkish posture and his refusal to lower rates much sooner. The president bemoaned Powell’s habit of making policy decisions “too late” in a social media post. Trump reignited rumors that he will attempt to remove the Fed chairman from office.
After Powell made it plain that he was not in a rush to drop rates, stocks fell precipitously, and Trump responded by threatening to dismiss Powell, undermining the notion of Federal Reserve independence. Bianchi stated that he did not believe Trump would carry out his threat.
“The fact that Powell’s tenure is about to expire is not the primary reason I believe he will fire him. “I believe that the disruption that would result from doing so would be far greater than the advantage,” he stated.
Financial markets would anticipate higher interest rates in the future if Powell were removed. Governments do not like to take away the punch bowl from the party, which leads to excessive spending, greater debt, and ultimately higher inflation, according to a Fed official from the 1960s.
There are numerous ways in which this would harm the economy. However, it would make the president’s ambitious tax-cutting proposal more difficult.
“I think Treasury Secretary Bessent understands that this would be an absolute disaster for the administration, forget about more broadly,” Bianchi stated.
During his first term in 2018, Trump became enraged when the Fed continued to raise interest rates gradually following the passage of his tax-cut proposal. According to Bianchi, market participants generally lowered their estimates for the future level of rates as a result of the president’s remarks suggesting that the Fed should lower rates.
“One way to say this is that markets were actually believing that somehow this pressure on the Fed was making it more likely that the Fed was going to stop increasing rates or potentially cutting them going forward,” Bianchi stated.
The market influences Fed officials’ actions, notwithstanding their insistence that politics has no bearing on them. In the end of 2018, the Fed ceased rate hikes and began rate cuts the next year.
“If you are able to move market expectations, you’re already halfway in moving actual policy,” Bianchi said. “In the first term, we found that effectively the Fed stopped increasing rates and actually started cutting them – in part, not only, but in part – because of this pressure.”
Market pressures can influence the Fed to take action, according to Bianchi. For example, Fed officials frequently contend that a tightening of policy occurs when the Fed fails to deliver on the market’s expectation of looser monetary policy.
According to Bianchi, investors shouldn’t assume that Powell was “going home and taking notes of what he was told to do by the president.” However, the central bank’s thinking may be impacted when market pressure and significant political pressure against the Fed coexist.
“At the end of the day, the Fed is only made up of humans,” Bianchi stated.
