{"id":171559,"date":"2024-05-08T09:28:29","date_gmt":"2024-05-08T15:28:29","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=171559"},"modified":"2024-05-08T09:28:32","modified_gmt":"2024-05-08T15:28:32","slug":"trump-allies-draft-federal-reserve-changes-that-could-replace-powell","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/trump-allies-draft-federal-reserve-changes-that-could-replace-powell","title":{"rendered":"Trump May Consider Shaking Up the Federal Reserve If Elected\u2014Here’s What That Could Look Like"},"content":{"rendered":"\n

A group of former officials and other allies of Former President Donald Trump has <\/span>drafted a document<\/span><\/a> outlining suggested policy changes that would impact the authority and independence of the Federal Reserve. <\/span>While it\u2019s <\/span>not clear<\/span> whether Trump was involved, some say he approved <\/span>of<\/span> the effort.<\/span> Trump has expressed to his advisors that he prefers a low interest rate environment <\/span>and<\/span> has publicly blamed economic issues on the central bank\u2019s monetary policy decisions, denouncing chairman Jerome Powell as \u201c<\/span>political<\/span><\/a>.\u201d<\/span><\/p>\n\n\n\n

Ironically, the document proposes changes that could make the Federal Reserve more vulnerable to political influence. <\/span>For example, it suggests the president should oversee federal funds rate decisions<\/span>, as well as<\/span> have the authority to demote Powell before the end of his term.<\/span> <\/span><\/p>\n\n\n\n

Politicians on both sides of the political spectrum who value the Fed\u2019s independence, including former Trump administration officials, have expressed alarm at <\/span>the idea of<\/span> allowing the White House to intervene in the Fed\u2019s decision-making processes and warned of dire consequences for the global economy if this comes to fruition. On the other hand, some Trump advisors believe it\u2019s unconstitutional for the Fed to operate without interference and that the Fed\u2019s independence leads to policy errors that hurt the U.S. economy. <\/span><\/p>\n\n\n\n

It\u2019s <\/span>not clear<\/span> whether stripping the Fed of its autonomy would be legally feasible since such a policy would face numerous institutional obstacles. And Trump\u2019s senior advisors say <\/span>the policy recommendations shouldn\u2019t be considered<\/span> official <\/span>at this time<\/span>. Nevertheless, as the debate over the optimal role of the central bank picks up, it\u2019s worthwhile to understand the potential implications of restricting the Fed\u2019s independence.<\/span><\/p>\n\n\n\n

Why the Fed Maintains Its Independence<\/span><\/h2>\n\n\n\n

The Fed\u2019s <\/span>dual goal<\/span><\/a> is to maintain maximum employment, a flexible measure based on <\/span>factors in the labor market<\/span>, while also keeping inflation stable at a target rate of 2% per year. It achieves both through monetary policy, primarily by adjusting the target for the federal funds rate<\/span>, <\/span>in an effort to <\/span>either<\/span> encourage or restrict economic growth and consumer demand.<\/span> <\/span><\/p>\n\n\n\n

Congress decided that the Fed is most effective when it makes monetary policy decisions <\/span>solely<\/span> based on economic conditions and structured the central bank as an <\/span>independent agency<\/span><\/a> to ensure it isn\u2019t subject to political pressures. <\/span>The reasoning <\/span>goes<\/span> that the federal government may have political motivations for keeping interest rates low in an election year, even if loose monetary policy wouldn\u2019t benefit the economy <\/span>in the<\/span> long term.<\/span> <\/span><\/p>\n\n\n\n

The Fed is still <\/span>accountable<\/span><\/a> to Congress and subject to independent audits, but its independence allows for policy decisions based on objective economic data. Additionally, while the president appoints members of the Fed\u2019s board of governors and the Senate approves the appointments, the president doesn\u2019t have the authority to remove a governor over a policy disagreement. Fed governors also have staggered 14-year terms, making it difficult for a president <\/span>to completely reshape the board according to their political preferences<\/span>. <\/span><\/p>\n\n\n\n

Historical evidence indicates that independent central banks are more successful at <\/span>keeping prices stable<\/span>. <\/span>Studies<\/span><\/a> from the International Monetary Fund show that countries with independent central banks experienced lower inflation rates and better long-term economic outcomes. <\/span><\/p>\n\n\n\n

However, credibility and accountability are essential to achieving these benefits. Some argue that too much operational independence in a federal agency <\/span>is contrary to<\/span> democracy and that freedom from political influence requires a balance between <\/span>independence<\/span> and accountability. <\/span>For example, the Manhattan Institute <\/span>advocates<\/span><\/a> for an overhaul of the Fed\u2019s governing structure<\/span>\u2014one<\/span> that increases White House oversight while <\/span>also<\/span> allowing for the democratic participation of more Reserve Bank leaders in monetary policy decisions.<\/span> <\/span><\/p>\n\n\n\n

How Trump Allies Want to Limit the Fed\u2019s Authority<\/span><\/h2>\n\n\n\n

While the <\/span>details of the plan<\/span> are not available to the public, some Trump advisors have discussed requiring Fed governors to consult with the president on the agency\u2019s rate-setting agenda. <\/span>Others have suggested that Trump should <\/span>serve on the board in an official capacity<\/span>, though several Trump allies have called that idea far-fetched.<\/span> <\/span><\/p>\n\n\n\n

The document also suggests requiring the Fed to undergo a formal review process when issuing new policies, similar to other government agencies within the Office of Management and Budget, and giving the Treasury Department more authority over emergency lending programs offered jointly with the Fed. <\/span><\/p>\n\n\n\n

The group of Trump allies is also working <\/span>out how<\/span> to give Trump the authority to remove Jerome Powell from his position as chairman should the former president be reelected. <\/span>This<\/span> would likely require demoting Powell and replacing him with another sitting board member since the law is clear that <\/span>a governor\u2019s term can\u2019t be cut<\/span> short due to policy disagreements. <\/span><\/p>\n\n\n\n

The Potential Impact on Mortgage Rates and the Global Economy<\/span><\/h2>\n\n\n\n

While political influence on monetary policy might lead to artificially low mortgage rates initially, some Trump advisors think the plan could have negative consequences. <\/span><\/p>\n\n\n\n

For example, lenders may respond directly to the prospect of uncontrolled inflation by setting <\/span>higher risk premiums on mortgages<\/span><\/a>, reasoning that future interest payments over the term would <\/span>have reduced<\/span> purchasing power. <\/span>And if<\/span> investors caught wind of the <\/span>fact that the president supported<\/span> cutting rates amid high inflation, they might lose confidence in the Fed\u2019s ability to respond to economic conditions.<\/span> Their inflation expectations could lead to weaker demand for U.S. debt securities. The market would respond with higher Treasury yields, <\/span>which would <\/span>push<\/span> mortgage rates<\/span><\/a> higher. <\/span><\/p>\n\n\n\n

If<\/span> economic uncertainty triggered a <\/span>long-term bond selloff<\/span><\/a>, the stock market would also decline<\/span>.<\/span> Investors might lose confidence in the nation\u2019s financial stability and become more aversive to long-term investment commitments. <\/span>REITs<\/span><\/a>, <\/span>which are<\/span> <\/span>particularly sensitive<\/span><\/a> to changes in Treasury yields, would drop in value dramatically.<\/span><\/p>\n\n\n\n

And since<\/span> the U.S. economy is the world\u2019s largest and the U.S. stock market serves as a global benchmark, a loss of confidence in U.S. financial stability could lead to global market volatility. International investors might withdraw from the U.S. market, <\/span>which would further reduce<\/span> stock prices.<\/span><\/p>\n\n\n\n

That doesn\u2019t mean <\/span>that reforming<\/span> the Fed is impossible without global financial chaos. But any changes to the Fed\u2019s governance <\/span>need to<\/span> ensure confidence in the agency\u2019s separation from political interference. Congress has <\/span>reshaped the Fed<\/span><\/a> many times throughout history, but typically, it’s taken legislative action to provide the agency with more autonomy.<\/span><\/p>\n\n\n\n

However, when former president Richard Nixon appointed Arthur Burns to lead the Fed from 1970 to 1978<\/span>, a more cooperative relationship ensued<\/span>.<\/span> Burns <\/span>was accused<\/span> of orienting the Fed\u2019s policy decisions toward the president\u2019s preferences, and most economists <\/span>believe<\/span><\/a> more White House influence led to a painful period of high inflation that negatively impacted the economy for many years. So, with history as a guide, the markets are likely to respond to any Fed reform that threatens a recurrence of the Burns situation. <\/span><\/p>\n\n\n\n

It may be possible for Congress to make changes that increase the Fed\u2019s accountability without leaving the agency vulnerable to political influence and triggering economic strife. For example, some advocates for reform within the Fed have <\/span>recommended<\/span><\/a> requiring <\/span>actual<\/span> experience in financial markets for Fed governors and allowing all Reserve Bank presidents to be involved in every budgetary and monetary policy decision. Other suggestions include eliminating the maximum employment mandate and removing conflicts of interest\u2014for example, limiting the Fed\u2019s portfolio to Treasury securities and prohibiting the central bank from issuing and enforcing regulations.<\/span><\/p>\n\n\n\n

The intent of these proposed changes is<\/span> to increase accountability for the Fed and reduce political interference. <\/span>But, allowing the president to influence the Fed\u2019s decisions <\/span>directly<\/span> would invite significant political pressure.<\/span> So, the draft document raises concerns, even among Trump administration officials. <\/span><\/p>\n\n\n\n

Ian Katz, director of research consultancy firm Capital Alpha Partners, <\/span>explained<\/span><\/a> to The Hill that Trump allies\u2019 recommendations would impact the markets dramatically, saying: \u201cThere are plenty of people in the markets who would like to see Trump be president again. <\/span>I don\u2019t think <\/span>there are<\/span> plenty of people in the markets <\/span>who<\/span> would like to see Trump be de facto Fed chair.\u201d<\/span> <\/span><\/p>\n\n\n\n

The Bottom Line<\/span><\/h2>\n\n\n\n

Trump was not the first president to blame the Fed for the nation\u2019s economic troubles\u2014the <\/span>independence of the central bank<\/span> makes it a convenient scapegoat.<\/span> The Fed has made policy errors throughout history that many believe hurt the economy, so it\u2019s reasonable for an administration to question the <\/span>rules governing the agency<\/span>.<\/span> <\/span><\/p>\n\n\n\n

Ultimately, this is just one extra issue voters will have to\u00a0weigh when going\u00a0to the ballot box this November.<\/span><\/p>\n\n\n\n \n

\n \n\n
\n \n\n
\n
\n \n\n

Get the Best Loan Today<\/p>\n\n\n\n

Find trusted, investor-friendly<\/strong><\/em> lenders who specialize in your strategy. <\/p>\n\n\n\n

<\/p>\n\n\n\n

\n Find a Lender<\/a>\n <\/div>\n\n <\/main>\n <\/div>\n\n
\n \n <\/div>\n <\/div>\n<\/div>\n\n <\/div>\n \n\n\n
\n \n
\n \n\n
<\/div>\n\n\n\n
\n \n\n
\n
\n \n\n

Join the community<\/h3>\n\n\n\n

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n

\n Sign Up<\/a>\n <\/div>\n\n <\/main>\n <\/div>\n\n <\/div>\n<\/div>\n\n\n
<\/div>\n\n\n <\/div>\n <\/div><\/div>\n","protected":false},"excerpt":{"rendered":"

A group of former officials and other allies of Former President Donald Trump has drafted a document outlining suggested policy changes that would impact the authority and independence of the Federal Reserve. While […]<\/p>\n","protected":false},"author":613615,"featured_media":171561,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7384],"tags":[],"class_list":["post-171559","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-politics-policy"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171559","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613615"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=171559"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/171559\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/171561"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=171559"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=171559"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=171559"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}