Trump’s fiscal power threatens the Federal Reserve’s purpose
By: Walker Cox
0.25% doesn’t seem like a lot. But when it comes to interest rates, even such a small cut could have serious consequences. In his address to the World Economic Forum in January, President Trump regaled top CEOs and world leaders with his supposedly bulletproof and restorative economic policy. In between tariffs and tax cuts, Trump said he’ll “demand that interest rates drop immediately, and likewise they should be dropping all over the world.” Despite reassuring everyone in a post-speech interview that he “knows interest rates much better than [the Federal Reserve] does,” Trump’s proposal to lower interest rates, even by 0.25%, might just be unwise. The Fed must hold its interest rate steady to maintain its autonomy and prevent unnecessary inflation. To understand why, we have to look at the purpose of the Fed, the importance of its administered interest rates, and the dangers to it lurking in Trump’s economic policy.
The Federal Reserve was established as an entity independent of the federal government with two goals: stable prices and low unemployment. It achieves these goals by adjusting three interest rates that primarily affect banks, which in turn affect the price of money throughout the nation. President Trump has suggested on numerous occasions that he wants to control where the Fed sets interest. According to a study by Brookings, Trump has pressured the Fed to lower rates on nearly every occasion he’s had the opportunity to. In a time marred by record inflation, lowering interest rates signals good times ahead. Having campaigned on slashing inflation, President Trump would like to look good, but if the Fed doesn’t lower rates in January, he won’t look as good as he wants. Before we even entertain the economic validity of Trump’s argument for lower rates, we should consider what dangerous precedent the Fed might set by bending to Trump’s will. Even if interest rates should decrease, it’s best that the Fed remains sacrosanct by not jumping to action just days after Trump takes office.
Though Trump has repeatedly distanced himself from Project 2025, there’s no doubt the people he brought into government will enact portions of the controversial agenda. Project 2025’s most mundane, but possibly most impactful proposals are found in the section about the Fed. The project aims to abolish how the Fed pays and collects interest from banks. The Fed’s ability to move the rate at which banks deposit and lend keeps national rates effectively leashed. Removing the Fed’s capability to administer these rates would effectively neuter its monetary policy, leaving our economy to the whim of tax cuts and government spending—both of which are dictated by the White House and Congress. If Trump cannot pressure the Fed as he would like, does he have the ability to debilitate and override them? There’s legal debate, but the Fed needs to hold its own, starting now.
Besides the bullying and bluster, it’s illogical for interest rates to decrease. Trump’s economic policies make sure of that. Trump’s tariffs impose taxes on goods entering the US. Foreign manufacturers are hurt and domestic ones are favored. If you take a look at nearly any product at hand, however, and find a “Made in China” label, you can probably guess how well tariffs work. American companies and consumers will still buy foreign goods, but now at a higher price. Tariffs targeting niche sectors (say, micro-chips) may have the desired effects in their respective markets, but blanket ones, as Trump proposes, will drive prices up nationwide. Seasoned economists will point out that tariffs only increase prices once, when they are first imposed, and that this effect is not commensurate with inflation. Tariffs, however, lead to trade wars, which lead to more tariffs, which lead to the expectation that more tariffs will follow and prices will continue to rise. The most seasoned economists will tell you that it doesn’t matter if the first set of tariffs causes inflation—it’s the expectation of more that leads people to spend their money before it becomes impotent.
But industries in the US will prosper, right? Wrong. We love cheap labor, but most of it comes from across our Southern border. If Trump deports the 8.3 million undocumented workers thought to be in the country, operating costs for domestic companies will inevitably rise. They’ll be forced to raise the price of their products to compensate for higher wages or lower outputs. Whether deporting immigrants or not is beneficial to American workers, it will lead to inflated prices. And whether inflated prices are worth it for what positive effects deportation might have, it makes no sense to lower the interest rate.
Trump also proposes major tax cuts and industry deregulations. More money in people’s and corporations’ pockets spells increased demand. An increase in demand with no complementary increase in American production capacity (workers leaving doesn’t help) leads to increased price levels—it’s econ 101. And a lowered interest rate will disincentivize people from investing or saving their money. Whether you agree with cutting taxes or not, you have to do some serious hand-waving in order for inflation to disappear with them.
Trump does not know interest rates better than the Fed does. He has, though, been elected President, and is free to pursue whatever fiscal policy he likes. Giving him the power to change monetary policy and interest rates, however, violates how our country has operated for decades, treads crudely on the institutional pillars that uphold our economy, and runs counter to economic common sense. The Fed must not buckle, even by 0.25%.
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