President Donald Trump's aides have reportedly hatched a secret plan to oust the Federal Reserve chairman and allow the president to set interest rates.
Allies are said to have developed various proposals for how monetary policy should be conducted in the second Trump administration, including rolling back central bank independence that has been critical to the functioning of the economy and financial system in recent years. ing. Decades.
According to the Wall Street Journal, supporters of the Republican candidate have compiled a 10-page document outlining a new vision for central bank operations and monetary policy.
This includes the power to remove Jerome Powell from his position as chairman of the Federal Open Market Committee.
Mr. Trump refused to give incumbent Janet Yellen a second term at the Fed and appointed Mr. Powell in his first term as president.
Yellen currently serves as President Joe Biden's Treasury secretary.
The document also states that Mr. Trump may be consulted on interest rate decisions by the Federal Reserve Chairman, who may negotiate final decisions on borrowing costs with other policymakers on his behalf. Suggests.
Less drastic changes to the central bank could include subjecting its regulations to more regular review by the White House, the Journal reported.
As president, Mr. Trump regularly called for lower interest rates to stimulate the economy and expressed dissatisfaction with Mr. Powell's decisions. In 2019, he said Fed officials have “no guts, no sense, no vision.”
Any move to limit the Fed's independence is likely to be controversial. Central bank independence is a central pillar of the modern financial system.
Michael Pearce of Oxford Economics said: “Any serious attempt to weaken the Fed runs the risk of backfiring.'' Historically, political pressure to lower interest rates has backfired and the Fed has There are many instances where policies have been more tightened than they otherwise would have been.”
Even if interest rates were to fall, financial markets would recognize the risk of higher inflation and impose higher borrowing costs on the U.S. government to compensate. This will offset the expected economic stimulus.
The temptation for the president to lower interest rates under the proposed system could also prolong the U.S. inflation crisis.
“If President Trump allows inflation to run out of control, his supporters will probably be the ones who will suffer the most,” said James Knightley, an economist at ING. Trump may want to lower interest rates, but if inflation takes hold, it could pose a bigger threat to the success of his presidency. ”
Robust consumer spending and stubborn inflation have raised expectations that the Fed will need to keep interest rates steady for an extended period of time to keep prices from rising.
New data on Friday showed core inflation in March did not fall as much as analysts expected, holding steady at 2.8%.
Charles Hepworth of GAM Investments said the rate of inflation would force Powell to keep interest rates on hold.
“This is a level that will hardly rise if we cut interest rates early,” he said.
With interest rates reaching 5.5% in the United States, interest rates will play an important role in this year's elections. Financial market traders are pricing in just one rate cut this year, most likely in November.
If this prediction holds true, given the timing of the election, Americans will no longer benefit from lower borrowing costs by the time they go to vote.
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