Donald Trump wants to take over the Federal Reserve just like he has taken over both houses of the US Congress. Specifically, he wants substantially lower interest rates. Considering the man’s success so far it is not beyond belief that he will succeed and then the Fed will simply march to his wishes instead of following the mandate they received from Congress years ago.
What Is the Federal Reserve’s Mandate
When the Federal Reserve was created in 1913 it was tasked with maintaining financial stability which generally means quelling inflation or stimulating the economy when a recession hit. In the 1970s Congress added one more task, maintaining optimal levels of employment. Thus for the last fifty years the Fed has had a balancing act in which they raise interest rates to help control inflation and lower rates in order to stimulate the economy and create higher employment.
How Is the Fed Managing Its Balancing Act Today?
In the years immediately after the Financial Crisis the Fed dropped interest rates to near zero. This made the stock market boom and made bank deposits CDs and US Treasuries less attractive. They were in the process of raising rates again when the Covid Pandemic hit and then they lowered rates again at the same time that two successive presidents and Congress poured money into the economy by sending checks to everyone who had paid taxes. As the pandemic subsided inflation rose to levels not seen in more than 40 years due to supply shortages and all of the money poured into the economy. Thus the Fed raised rates like it did in the early1980s. This act has helped bring inflation down. However, the Trump administration, its tariffs, and the “big beautiful bill from Congress that lowered taxes and drove up spending has raised the specter of more inflation. Thus the Fed, whose decisions are data driven, has been hesitant to lower rates for the 4.5% range until the effects of these acts become clearer
What Does Donald Trump Want From the Fed?
What Trump wants is lower interest rates but also he wants long term control over how the Fed operates. He can get this by appointing his own people when terms become vacant such as Fed chair Powell’s position next year. However, he appears not to want to wait. This is demonstrated by his desire to remove a Fed governor “for cause” when no cause has been demonstrated and proven in court.
What Will Trump’s Gamble on the Fed Do to the Economy and Your Investments?
Bloomberg recently published a useful article in regard to whether or not Trump´s gamble on the Fed will push rates higher. They make the point that ten year Treasury interest rates, which typically dictate the level of bank loans and mortgages may well soar due to the uncertainty introduced into Fed decisions if the Fed ends up following the current president’s marching orders. No matter where the open market committee of the Fed sets rates for bank to bank loans, treasury bill sell at auction and the rate set is dependent on demand and not something that the Fed, the US Treasury, or the President can mandate. As the Bloomberg article says, it is the sum total of bond traders and investors around the world who determine the ten year yield and when those folks come to distrust the “full faith and credit” of the United States government there will be little that the Fed can do with their control over short term rates to set the ten year rate and how much the US pays on its debts!
Without trying to be overly dramatic, we are concerned that the current drama about who is control of the Federal Reserve, may serve to send real interest rates in the real world higher, drive up unemployment and cause a recession or worse. Such, we think, is the real risk of the president messing with the independence of the US Federal Reserve. Maybe the best way to hedge your bets at this time is to hold a sizable part of your portfolio in cash or cash equivalents as higher rates will drive up the value of the US dollar.