Can the Federal Reserve really stay out of politics?

Despite the Federal Reserve trying to stay as far away from politics as possible in 2024, Tuesday's election is crucial for the Fed and its Chairman Jerome Powell.

The next U.S. president will fill multiple vacancies, and Powell's term as Fed chairman will end in May 2026, meaning either Trump or Harris will be able to choose the next leader of the Fed.

Perhaps the key question is, with Harris suggesting a more status quo approach if she wins, will Trump be more disruptive than he was from 2017 to 2021?

During his presidency, Trump frequently attacked Powell and publicly pushed the central bank to act according to his ideas, even suggesting negative interest rates, and he has hinted that if he were to win a second term, he might do even more.

Mark Spindel, Chief Investment Officer of Potomac River Capital and a historian studying the Fed and politics, pointed out in a recent interview that this is “a significant crossroads for the Fed.” He added that if the Trump team wins, they will clearly “be very proactive.”

Fed policymakers will also have the opportunity to discuss these implications this week, as the FOMC will hold meetings in Washington, D.C. on Wednesday and Thursday. The main agenda for officials is whether to implement a second rate cut in 2024, with the market expecting the Fed to cut rates by 25 basis points this week, but political factors will certainly linger in their minds.

Trump: Huge Uncertainty

If Trump wins, it is unclear whether he would openly threaten the Fed's independence, but a Trump victory would immediately inject huge uncertainty, partly because he has sent many conflicting signals.

He has talked about believing he has the right to fire Powell but later downplayed that idea. He said he wanted to have a “say” in setting interest rates, but then immediately walked that back.

He has also expressed varying degrees of hostility toward a significant rate cut in September, recently stating in early October that the cut was “too large, and everyone knows this is a political strategy.”

Trump's allies have also proposed a range of other ideas that could inject new uncertainty into the Fed, including new controls over the Fed, even without firing Powell.

These different ideas have been a hot topic of discussion in the markets. U.S. media recently reported that with less than three weeks before the election, Trump’s aides had another idea: to downgrade the current Fed Vice Chair for supervision, Randal Quarles.

Perhaps the only clear thing is that there will be intense debate among Trump’s allies about how to introduce more political factors into the Fed, which has long tried to distance itself from politics.

Vice presidential candidate JD Vance stated in an interview in August, “Whether you agree or not, we should let America’s elected leaders weigh in on the most important decisions facing our country.”

His remarks drew attention, and he added that he believes monetary policy “should fundamentally be a political decision.” Trump also made it clear that despite initially elevating Powell to his current position, he will not have a third term as Federal Reserve Chairman if he wins. Therefore, Trump's loyal supporters have been rallying for this for several months.

Most of the names include figures who have been around Trump in economic policy over the years, from former Federal Reserve Governor Kevin Warsh (a popular candidate for Federal Reserve Chairman last time) to Kevin Hassett, who served as a senior advisor to Trump in the White House.

Warsh was recently jokingly introduced as the "incoming chairman" during an appearance, suggesting that if he were selected, he would seek to change direction, criticizing the Federal Reserve's recent interest rate cuts in September and implying that the central bank seems "on the verge of collapse."

Hassett, on the other hand, recently held a different view, arguing that the evidence of the Federal Reserve's significant rate cut in September is a weak job market.

A less likely competitor is Judy Shelton, a former nominee for Federal Reserve Chairman, who has been a strong supporter of Trump throughout the campaign. Trump's last attempt to choose her was blocked by the Senate, but that hasn't diminished her criticism of the central bank. In a recent appearance, she even called the Federal Reserve politicized and stated that it could influence election outcomes.

Harris Promises "Never to Intervene"

Meanwhile, Harris hinted that she would take a less interventionist approach with the Federal Reserve, at least before selecting new governors.

She told reporters in August, "The Federal Reserve is an independent entity, and as president, I will never intervene in the Federal Reserve's decisions."

The Biden administration also frequently emphasizes the independence of the Federal Reserve to reassure the markets and signal to Wall Street that things could be very different if Trump returns to the Oval Office.

A recent blog post from the White House Council of Economic Advisers highlighted "the importance of independent central banks."

This echoes a viewpoint from independent economists, who point out that history shows political interference in monetary policy has long led to negative economic outcomes.

Harris has also not provided much clue about who she would choose if she wins, with rumors suggesting she would look for moderate or more left-leaning candidates.

A centrist candidate might be similar to Powell, who is a registered Republican; nonetheless, Presidents Obama, Trump, and Biden have all nominated him for various positions. Even when she voted against Powell's appointment as Federal Reserve Chairman in 2018, Harris expressed admiration for Powell.

A more left-leaning candidate could be Lael Brainard, who served as Powell's deputy and went to the White House in 2023 to serve as Biden's chief economic advisor.

As for Powell himself, "I just feel this is Powell's last term," Spindel said, adding that if a soft landing economic scenario is possible, "if he can control inflation, I think he will declare victory and then 'retire with honor.'"

Ultimately, even if monetary policy is unlikely to sway many votes, polls typically indicate that people have little understanding of the central bank's role, but the candidates elected by voters on Tuesday will have a significant impact on their top concern—inflation But Spindel added that politicians who try to intervene may need to be cautious about their wishes.

He studied the interactions between politicians and the Federal Reserve over the decades, and noted that "the beauty of Congress's design is that the legislative body created this entity to shield itself from blame." However, he pointed out that the more actively the president (like Trump) gets involved, "the more you clearly have to take responsibility."