Euros & Dollars: Trump’s Attack on the Federal Reserve

In a Breitbart interview on January 2nd, former President Donald Trump was asked “if he thinks the Federal Reserve and Chairman Jerome Powell will cut interest rates” during 2024 “specifically to help Joe Biden” win in November. 

The former president replied that “I think they will” do that, explaining that Chairman Powell “will … do something that will lower the rates and maybe keep things going.” 

When asked by Breitbart if this would “amount to election interference,” the former president replied that it “obviously” would amount to that.

This is an astounding, irresponsible case of interference—but not by the Federal Reserve. The interfering part here is Donald Trump. It is very unbecoming of a presidential candidate to inject himself into the Federal Reserve’s monetary policymaking. 

To be fair, Breitbart could have refrained from even asking the question. In doing so, they followed the same route as, e.g., Barrons did in a December 29th overview of challenges for the Federal Reserve going into 2024. Furthermore, Trump himself more or less invites questions about his view of the Federal Reserve: he has a history of flip-flopping on his view of the central bank’s monetary policy. 

Some accounts of his statements on the Fed and Chairman Powell are loaded with biased nonsense, but even they contain a grain of truth: 

• Back in 2019, when the Fed was keeping its Federal Funds rate elevated but below 2.5%, President Trump argued hard for them to cut rates instead; 
• In his Breitbart interview, at a time when the Funds rate is 5.3%, Trump apparently opposes lower interest rates. 

The former president’s positions on what the Fed should do undoubtedly lack economic motivation. Although the Fed made some interest rate cuts in 2019, if they had gone further in order to please the president, they would have gravely overheated the U.S. economy. More cheap liquidity at that time could also have stimulated a dangerous bubble of financial speculation.

As Figure 1 reports, the rate cuts the Fed executed in 2019 came on the heels of several rate hikes in 2017 and 2018. However, the 2019 cuts (red arrow in Figure 1) were nothing compared to the Fed’s response to the 2020 pandemic:

Figure 1

Any sound analysis of the U.S. economy in 2019 would have concluded that the last thing needed was expansionary monetary policy, i.e., lower interest rates. However, Trump probably did not make an economic analysis before he spoke in favor of more aggressive rate cuts: his motivation was likely concerns about the rising cost of the U.S. government’s debt. 

Trump had good reasons to be concerned: in his first year and a half in office, the yields (interest rates) that the U.S. Treasury had to pay to sell new debt increased significantly. Figure 2 exemplifies this rise with the yields from the monthly auctions of new 10-year Treasury notes. After having fallen in early 2017, bottoming out at 1.45% in May of that year, the yields climbed steadily (solid red arrow in Figure 2) until peaking just below 3.2% in October of 2018.

Figure 2

When the Federal Reserve reversed its rate hikes from 2017 and early 2018, the yields on new Treasury debt also declined (see dashed arrow). Although the auction yields only have a marginal effect on the total debt cost—they only apply to new debt—they do work their way into the total cost fairly quickly. This is especially true for U.S. debt, where most of the debt matures in less than 10 years. 

Therefore, when Trump saw the rise in Treasury auction yields early on in his presidency, he likely panicked and started worrying about the political fallout of this cost increase. At that point, he should have worked with Congress to end budget deficits, but like every other president elected in this century, he punted on that issue. 

Notably, other presidents have refrained from commenting on the Fed’s monetary policy. Trump, on the other hand, prefers to vocally share his opinions on the matter. This is harmful to the integrity of the Federal Reserve, but it is also harmful to him as a presidential candidate. His comment to Breitbart, effectively calling on the Fed not to cut interest rates, reveals that he has a completely political motive and is not at all concerned about the effects of monetary policy on the economy as a whole. 

His widely shared opinions also raise the question of whether Trump, if elected in November, will try to replace Jerome Powell with a Fed chairman willing to cut interest rates per the president’s wishes. Technically, he cannot exercise that level of influence over the central bank: rate policies are set by the Fed’s 12-member Federal Open Market Committee, where the chairman is just one vote and the president’s appointment powers have no substantive influence. 

Regardless of what Trump has in mind for the Fed, it is disconcerting—and frankly a warning sign for the upcoming election—that he is willing to so blatantly politicize monetary policy. America has one of the best-run central banks in the world; its expansionary monetary policy is the direct result of lax fiscal policy by Congress. If the lawmakers on Capitol Hill learned to balance their budget, the Fed would refrain from monetary excesses as we saw during the recent pandemic.

Perhaps the worst part of Trump’s Fed statements is the fact that if he got what he seems to want, namely low interest rates when he is in office, he would be playing with fire. When a central bank lowers its policy-setting interest rate (can you say ‘Federal Reserve’s Federal Funds Rate’ five times fast?), that rate cut comes from an increase in the money supply. This is equivalent to an increase in the supply of liquidity in the banking system; to make money off that extra liquidity, banks cut interest rates and increase lending.

Theoretically, the increase in money supply happens through open-market purchases of U.S. Treasury debt: by increasing demand for those securities, the Fed lowers the interest rate (which moves in the opposite direction of the price of the security). In practice, the Fed can increase the money supply without having to buy government debt. However, that mechanism is pertinent in this context: with $34 trillion worth of U.S. debt out there, the Fed has ample opportunities to increase its ownership of that debt if it wants to increase the money supply. 

The only problem with this policy, which I fear Trump would endorse if elected president, is that it is the fastest, most vicious way to create monetary inflation. The evidence is irrefutable but it does not yet seem to have reached the Republican frontrunner in the November presidential election.