According to reports, Donald Trump's aides have drawn up secret plans to oust the Federal Reserve chairman and let the president set interest rates.
The allies are said to have drawn up a series of proposals for how monetary policy could be conducted in a second Trump administration, including rolling back central bank independence, which has been crucial to the functioning of the economy and the financial system. decades.
According to the Wall Street Journal, supporters of the Republican candidate have put together a ten-page document with a new vision for running the central bank and monetary policy.
It includes the power to Remove Jerome Powell from his position as chairman of the interest rate-setting Federal Open Market Committee.
Trump appointed Powell in his first term as president after refusing to give the incumbent president, Janet Yellen, a second term at the Federal Reserve.
Ms. Yellen is now Treasury Secretary to Joe Biden, the president.
The document also suggests that Mr. Trump could be consulted on interest rate decisions by the chairman of the Federal Reserve, who would then negotiate on his behalf with other policymakers on the final decision on borrowing costs.
Less drastic changes to the central bank could include exposing its regulations to more regular reviews by the White House, the WSJ reported.
As president, Trump regularly called for lower interest rates to stimulate the economy and expressed dissatisfaction with Mr. Powell's decisions. In 2019, he said Fed officials had “no guts, no brains, no vision.”
Measures to limit the Fed's independence would likely prove controversial. The independence of central banks has become a central pillar of the modern financial system.
Michael Pearce of Oxford Economics said: “Any serious attempt to undermine the Fed would run the risk of having the opposite effect. There are many examples in history where political pressure for lower interest rates has had the opposite effect and pushed the Fed to adopt tighter policy than otherwise.”
Even if interest rates were to fall, financial markets would recognize the risk of higher inflation and charge the U.S. government higher financing costs to compensate. This would negate any expected boost to the economy.
The temptation for the president to cut rates under the proposed system could also persist the inflation crisis in the US.
James Knightley, economist at ING, said: “If Trump lets inflation rip, his own supporters are likely to be hit the hardest. Trump may want lower interest rates, but if inflation takes hold, that could be the bigger threat to the success of his presidency.”
Strong consumer spending and persistent inflation have raised expectations that the Fed will have to keep interest rates high for longer as it struggles to keep price increases under control.
Core inflation held steady at 2.8% in March, new figures showed on Friday, rather than falling as analysts expected.
Charles Hepworth of GAM Investments said this pace of price rises would force Mr Powell to leave rates unchanged.
He said: “This is a level that is hardly indicative of early rate cuts.”
Interest rates, which stand at 5.5% in the US, are expected to play a key role in this year's elections. Financial market traders have priced in just one cut this year, most likely to take place in November.
If this prediction comes true, the timing of the election means that Americans will not benefit from lower borrowing costs by the time they go to the polls.
