Ammon News - With Donald Trump’s recent victory in the U.S. presidential election and his preparation to return to the White House on January 20, 2025, attention is turning to his stance on monetary policy and the Federal Reserve’s future direction. This comeback follows two recent Federal Reserve rate cuts: a half-point reduction in September—the first since March 2020—followed by another quarter-point cut just two days ago. These moves have raised questions about Trump’s potential influence on the Federal Reserve’s monetary policy in the coming period.

Since its establishment in 1913, the Federal Reserve has faced various political pressures. Initially, the U.S. Treasury Secretary led central bank meetings. However, amendments to the Federal Reserve Act and a historic 1951 agreement between the Treasury and the Fed granted the central bank significant independence. Despite this shift, presidents continued attempting to influence Fed policies, including Presidents Harry Truman and Richard Nixon, who exerted substantial pressure on the Fed’s leadership to pursue policies aligned with their political objectives. Nixon’s influence on then-Fed Chairman Arthur Burns led to excessive inflation in the 1970s, which later required drastic intervention by Paul Volcker to stabilize the economy.

Trump’s recent criticisms of Fed Chairman Jerome Powell and his call for increased executive control resemble these historical precedents. However, many economists, including former Treasury Secretary Larry Summers, warn that undermining the Fed’s independence could jeopardize its core mission of economic stability. Summers emphasized that a president focused on short-term electoral gains may be less suited to manage the economy than the central bank, which relies on broader, long-term economic indicators.

During President Biden’s administration, the Federal Reserve maintained its independence, with Powell remaining free from presidential interference. Biden’s reappointment of Powell in 2021 reflected a respect for the nonpartisan nature of the institution.

The recent rate cuts align with the Fed’s efforts to stimulate economic growth and are in line with fiscal stimulus policies. However, they place the Fed in potential conflict with growing political pressures, especially under Trump’s impending leadership, who had repeatedly criticized high-interest policies during his first term.

Historically, Trump has been vocal about the Fed’s monetary policies and openly criticized them on multiple occasions. With his return to the White House, some analysts expect Trump to continue advocating for accelerated economic stimulus through expansionary monetary policies. He may push for further rate cuts to encourage investment and consumption, especially at the start of his new term, to boost market and public confidence.

In my view, there are two potential scenarios for Trump’s approach to the Federal Reserve:

First Scenario: Trump could pressure the Fed to accelerate rate cuts. He may seek to exert direct or indirect pressure on the Fed to expedite rate reductions, aiming for faster growth stimulation. Politically, this would serve him well, presenting him as a leader spearheading a robust economic recovery, bolstering his standing both domestically and internationally. However, this scenario could place the Fed in a challenging position, as it would have to balance between achieving monetary stability and responding to escalating political pressures.

Second Scenario: Trump may allow the Fed more freedom in decision-making. Despite his previous stance, Trump might focus on other issues this time, leaving more room for the Fed to manage monetary policy. With inflation controlled at 2.1%, unemployment close to natural rates at 4.1%, and economic growth at 2.8%—solid figures for an economy as large as the U.S.—this option could be more likely. Given the calm tone of his victory speech on the seventh of this month, he might prioritize other areas, such as foreign trade or tax reform, while leaving the central bank with relative flexibility in handling interest rates based on economic changes.

Regardless of whether Trump intervenes in interest rate policies, the U.S. economy is entering a critical period, and monetary policy directions will have substantial effects on multiple levels. Interest rate cuts aimed at stimulating economic growth are expected to continue, likely invigorating financial markets and increasing borrowing and spending, which would, in turn, drive economic growth higher. Conversely, the United States may face long-term risks if these policies lead to excessive inflation, placing the Fed in a difficult situation between stimulating the economy and maintaining price stability.

With Trump’s return to the White House and ongoing rate cuts, the battle for influence between the White House and the Federal Reserve will persist. Trump may seek to accelerate the pace of these cuts to stimulate the economy, but at the same time, the Fed remains under significant pressure to maintain its independence and ensure the economy’s long-term stability.