US Watch - US Elections - The Fed will be alright, but…

Our election coverage until now has focused on the candidates’ policies effects on inflation, growth and the resulting Fed policy. We concluded that under a Harris presidency, the economy would largely continue its current course, but a Trump presidency, and in particular the implementation of widespread tariffs and the resulting trade war, would have far reaching consequences, reigniting inflation and causing a recession. This is the first in a trilogy of weekly election pieces until the presidential election in November where we look at the impact of the candidates’ proposals beyond the headline macro-figures. In the first piece we analyze the extent to which the candidates respect existing institutions, such as the Fed, and the three branches of government. In the second piece, we look at US debt sustainability and fiscal plans. In the final piece we look at the candidates’ plans regarding anti-trust and financial regulation.

In this piece we consider the risks to the US’s institutions, with a primary focus on the Federal Reserve, where both parties have recently crossed lines in terms of its previously well-guarded independence. We also briefly write about the threat to in particular the executive branch, with the ‘unofficial’ version of Trump’s policy plans (Project 2025) suggesting sweeping changes to the status of civil servants, which could greatly influence their effectiveness and ability to weather unlawful policy proposals.

A short history of presidential interference with the Fed

Donald Trump was clearly not happy with the Fed’s decision to cut the policy rate by 50 bps just before the election, stating “I guess it shows the economy is very bad to cut it by that much, assuming that they are not just playing politics.” Trump had been arguing that rates should not be eased before the election as that would give an undue advantage to the incumbent. At the same time, he and running mate Vance have stated that they felt ‘strongly’ that presidents should have ‘at least a say’ over central bank policy decisions, arguing that interest rate is the policy tool that exerts the greatest impact on the economy and is set by bureaucrats, while the president is held accountable for the economy by the public. The democrats aren’t entirely innocent in this debate either, with three senators including Elizabeth Warren sending a letter to the Fed before the September meeting urging them to lower rates.

There’s a long history of US presidents trying to exert influence on policy rates, particularly around election times. Lyndon Johnson shoved the then Fed Chair up against a wall during an argument over monetary policy. Nixon pressured Chair Burns to loosen the money supply in the lead up to the election, spurring inflation. Reagan complained about Volcker’s moves, and summoned him to a private meeting ordering him not to raise rates prior to the 1984 election. George H.W. Bush asked Alan Greenspan to lower rates in a public interview. Clinton staunchly defended central bank independence, and George W. Bush and Obama followed the same course. Trump did not, repeatedly tweeting about their performance, and trying to stack the board with his yes-men. The Fed held its ground, but it raises worries about what might happen under a second Trump administration.

What could Trump actually do to undermine the Fed’s independence?

With current legislation, a president can appoint new Fed officials. During the upcoming presidential term, two positions open up. One is the important Fed chair position in 2026, currently filled by Jerome Powell, and the second is Adriana Kugler in 2028. Trump was the first president to not reappoint his predecessor’s Fed Chair, Janet Yellen, rather appointing Jerome Powell. Biden did reappoint Powell in 2021. The two members are only a small part of the 12-member FOMC, which includes seven governors appointed by the President, and confirmed by the Senate, and five from a rotating roster from the twelve regional Feds, appointed by directors from the individual banks. In his previous administration, two out of four appointees did not make it past Senate approval, although a victory in the current election would likely provide Trump with a Senate that is less likely to vote against his proposals. Powell could potentially be ‘removed for cause’ by the president as Fed Chair before the term is up, although there is no precedent. Even then, he would still be a governor until the end of 2028.

Trump could propose yes-man, including potentially himself, to the two positions and with sufficient support in the Senate (a republican senate majority is a likely outcome, especially if Trump wins the presidency), he could get them appointed. Monetary policy decisions are based on a vote, and two members out of twelve would not necessarily alter the technocratic decision making. There are two aggravating considerations though. First, more vacancies could arise, as few Fed governors serve their full term; the median is five years out of the fourteen year term. If the independence of the Fed is at stake, they could however reasonably be expected to serve the term at least until the Trump presidency is over. A second worry is the fact that the position of Fed Chair is clearly elevated above the other voting members. The chair is the public face of the board, holding the press conference following the meeting, and has historically held more than proportional sway in the Fed’s decision making.

To seriously attack the Fed’s independence, Trump would have to rewrite the Federal Reserve Act. This does not require only senate approval, but also house approval, so he would need full congress. Even in a majority Republican Congress, it is unlikely that he would get enough support. Moreover, markets would play their role, as a reduction in central bank independence is likely to increase inflation expectations, raising long-term yields, immediately punishing the mere thought of it.

The risk of a less independent Fed is not just that it would keep rates low under a Trump presidency, but also that they’d raise rates under future Democrat presidents. Alternatively, as the political climate around the current easing cycle shows, genuine policy uncertainty or disagreement can be interpreted as the Fed choosing sides, which could result in the Fed choosing suboptimal policy simply to avoid appearing partisan.

The threat to the branches of government is more acute

Broadly speaking, we can say that Harris’ plans and, to the extent that she could influence them, actions under Biden’s presidency, support the checks and balances for the three branches of government. A president, the head of the executive branch, can veto legislation in Congress, and nominates heads of federal agencies and high court appointees. Congress, the legislative branch, confirms or rejects the nominees (and can strictly speaking remove the president from office). The supreme court, heading the judicial branch, is nominated by the president and confirmed by the Senate, and can overturn unconstitutional laws.

It is natural for a president to nominate heads of agencies and judges that lean towards the president’s party. Trump greatly accelerated this process in his first presidency, appointing 226 judges, out of which 54 appeals court judges in his four year term, compared to an average of 321 (and 58 appeals) over the eight-year terms of his two predecessors. This ‘flipped’ the balance of majority democratic appointees to majority republican appointees in several appeals courts. He appointed three Supreme Court justices, the most since Reagan, again, in four years rather than most eight-year terms. He worked closely together with majority leader McConnell, who stated ‘You know what my top priority is. I’ve made it very clear. It’s the judiciary.’ At the end of his presidency, more than a quarter of federal judges were appointed by Trump. Meanwhile, Biden has appointed one supreme court judge, 44 appeals court judges and 166 other federal judges, reverting some of Trump’s work, but in generally less influential places.

The impact has been significant. Even with Trump no longer in office, Roe vs Wade was overturned. The EPA and other federal agencies lost regulatory power, and a decision early in the summer gives the president near-total immunity while in office. Their success in influencing the judicial system only sets the ground for further efforts. Trump has openly doubled down on aiming to influence the justice system for a long time, stating ‘We like people in their 30s so they’re there for 50 or 40 years’. It is likely that the ideological make-up of the judiciary would shift further republican.

With regards to the executive branch, Project 2025 poses the interpretation of the unitary executive theory which states that the President of the United States, read Donald Trump, should have sole authority over the entire executive branch. In order to implement this, they propose to reclassify civil service workers as political appointees. Trump himself in his ‘Agenda 47,’ suggests a similar system, dubbed Schedule F, that would achieve the same objective. While at odds with the 1883 Pendleton Act, even with a mixed congress, the state of the judicial system might allow him to push it through. This would expand the president’s nomination capabilities far beyond the current scope, allowing technocrats to be replaced by ideologically driven candidates. The president’s office could then potentially exert complete control over important federal agencies, such as the Department of Justice, the FBI and the FCC. This would allow for further concentration of power which would clearly not benefit the public.

The Fed’s independent functioning and its ability to set appropriate policy seems relatively well protected, making it unlikely that a president could exert strong control over monetary policy. The risk to the independent functioning of the judicial and executive branch is far larger, as the judicial system’s independence is already eroding, paving the way for changes to the executive branch.