How Trump Is Making the Fed’s Job Harder
Prof. William English, a former Fed official, says that the Federal Reserve’s mission of balancing inflation and employment has been complicated by a series of wild cards delivered by the administration, including tariffs and political pressure that culminated in an attempt to fire a member of the Board of Governors.
President Donald Trump and Federal Reserve Chair Jerome Powell touring a Federal Reserve renovation project in July.
What was the situation for the Fed at the beginning of the new administration?
By late last year, the Fed appeared to have succeeded in countering the very high post-COVID inflation without causing a recession. Tight monetary policy and the easing of the disruptions caused by the pandemic had brought inflation down to under 3%, while the unemployment rate was running near 4%—roughly consistent with maximum sustainable employment. The Fed anticipated that the economy would remain on track, with unemployment changing little this year and next, while inflation gradually returned to its target of 2%. Against that backdrop, the Fed expected to gradually move its policy interest rate back to a neutral level from the somewhat contractionary setting in place late last year.
How have the new administration’s policies complicated the Fed’s policymaking?
The new administration has complicated Fed policy in two ways. First, uncertainty about administration policies and their effects on the economy has made it more difficult to calibrate policy. Most prominently, the administration’s tariff policies are contributing to higher inflation and a weaker economy, making it more difficult to achieve the Fed’s desired “soft landing.” Past Fed analysis suggests that the tariffs that have been put in place are likely to boost inflation to more than 3%, while increasing the unemployment rate. Higher inflation would suggest a shift to tighter policy, but higher unemployment would point to easier policy. So the tariffs could lead to a policy dilemma for the Fed, particularly if higher inflation threatened to become embedded in wage- and price-setting.
The second source of complication is the administration’s efforts to gain political control over the Fed and monetary policy. Of course, the Federal Reserve has been subject to political pressure at times in the past, but in recent decades, such pressure has been fairly limited. However, the new administration has taken a more confrontational approach, with the president and members of his administration publicly pressing the Fed to cut interest rates, suggesting a possible desire to fire Jerome Powell as chair, and, more recently, making an effort to fire Governor Lisa Cook. If the administration is successful in undermining the Fed’s independence, research suggests that the result would be significantly higher inflation and worse economic performance over time.
How is the Fed doing at managing these threats to its performance?
Thus far, the Fed has responded to the heightened uncertainty by acknowledging the risks and waiting for additional information before making changes in policy. With the labor market softening significantly over the summer, the Fed now appears poised to ease policy at its meeting next week.
The Fed has also tried to set aside the political pressures and continue to focus its policy decisions and communication on fostering the goals provided for it by Congress: maximum employment and stable prices. That said, the administration has made the Fed’s task, which was already complicated following the pandemic, even more challenging.