Trump Seizes Opportunity for Board Resignation at the Fed
The unexpected resignation of Adriana Kugler from the Federal Reserve board has opened up an opportunity for President Donald Trump to nominate a new member who may align with his preference for lower interest rates. This new appointment could potentially increase Trump's influence on future interest rate decisions, leading to pressure for lower rates that could impact economic growth in the US.
Trump's new appointee could join the Federal Open Market Committee (FOMC), which sets benchmark interest rates that affect borrowing costs for consumers and businesses. A member sympathetic to Trump's views may push for rate cuts, especially as Trump argues the economy is doing well and should have lower rates, despite most economists and current Fed leadership favoring steady or higher rates to manage inflation.
Since the President designates the Fed chair, Trump’s new appointee could also challenge or eventually replace Jerome Powell, whose term as chair expires next May. However, it is said that Trump has indicated that it is "highly likely" that Powell will keep his position for now.
The potential for a new Fed board member raises concerns about the Federal Reserve's independence and the appropriate balance between controlling inflation and supporting growth. Congress retains ultimate power over the Fed’s authority and could intervene depending on political developments.
Trump has long demanded a significant reduction in the interest rate to stimulate consumption and investment. The Fed, however, has been cautious about monetary policy due to existing inflation risks from Trump's trade policies. According to a Congressional Budget Office estimate, Trump's new tax law will increase the deficit by around $3.3 trillion (approximately €2.8 trillion) over the next decade, which could further fuel inflation concerns.
Recent Fed reports indicate that U.S. growth slowed in the first half of the year, which could signal that the Fed will cut interest rates for the first time since December 2014 in September. At the central bank council's latest decision, two members, Michelle Bowman and Christopher Waller, advocated for a reduction in the interest rate.
Trump has expressed his "pleasure" at Kugler's resignation, as it opens up a seat on the central bank's board. However, the legal hurdles for removing Powell are high, and it is not legally clear whether a US president can actually remove the head of the central bank. Trump has stated that he would replace Powell "in a heartbeat," but he believes that doing so would unsettle the market.
Trump has again expressed criticism towards Fed Chairman Jerome Powell, referring to him as a "stubborn IDIOT." Despite this, dissenting voices in the central bank council are rare, but more members could align with Trump's stance under his pressure in the next decision.
In summary, the new appointment allows Trump to shape interest rate policy towards lower rates, potentially stimulating short-term economic growth by making borrowing cheaper. However, it raises concerns about the Federal Reserve's independence and the appropriate balance between controlling inflation and supporting growth. Congress retains ultimate power over the Fed’s authority and could intervene depending on political developments.
The new appointee, potentially aligned with Trump's preference for lower interest rates, could influence the Federal Open Market Committee (FOMC), impacting borrowing costs for consumers and businesses. This situation, coupled with Trump's advocacy for rate cuts, could escalate the pressure on the Federal Reserve to adjust interest rates lower, possibly affecting economic growth and inflation balance in the US.
Given Congress's ultimate power over the Fed’s authority and Trump's stated intention to shape interest rate policy, the political landscape surrounding the Federal Reserve's decisions could shift significantly, potentially blurring the lines of its independence.
