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Why You Should Pay Attention to the Fed

The U.S. Federal Reserve is well-known for its ability to change the nation’s interest rates, independently of the national government. However, when president-elect Donald Trump swears into office, this might change. 

Let’s back up for a second. The Fed was created independent of the U.S. government to protect its members against politics, which could influence their decisions. The part of the Fed responsible for controlling interest rates is the Federal Open Market Committee (FOMC). Its members hold monthly meetings to discuss monetary policies and are looking to increase interest rates at the next meeting in December. The FOMC makes its decision by looking at a variety of economic factors, of which the main two are unemployment and inflation. While unemployment has been at a solid level, the Fed didn’t increase rates in November since inflation did not hit their desired 2 percent mark.

So, what does this have to do with Trump? The FOMC target rate has been at a historically low 0.25 to 0.50 percent for almost a year. However, when Trump was elected, the chances for a December rate rise increased dramatically because Trump supports an economic plan that encourages inflation. His plan calls for tax cuts for businesses and greater infrastructure spending, which would increase growth, along with inflation. In response, the Fed increases interest rates, which decreases inflation.

 A fast-growing economy makes a president more favorable. However, the Fed’s purpose is to reduce the rampant growth in order to prevent catastrophic declines later like the Great Recession. For this reason, there are worries that Trump will try to prevent the Fed from increasing rates, so he looks better with the public for implementing a plan that calls for short-term economic growth. He has claimed “I love low interest rates” and accused Janet Yellen, the chair of the Fed, for keeping interest rates low to help President Obama and presidential candidate Hillary Clinton.

According to NPR, Yellen has spoken negatively about Trump’s “$1 trillion infrastructure spending program.” She does not believe such fiscal spending would be helpful to the economy given the debt it would create.

Business Insider reports “by 2018 Trump could have appointed four out of the seven members of the Federal Reserve’s Board of Governors.”  Although the Fed makes its decisions independently, its members are appointed by the President and approved by the Senate. Indirectly, Trump could influence the Fed by choosing members he believes are more dovish (those who prefer lower interest rates).

Trump’s businessman side loves low interest rates, but as a president, he must do what is best for the economy. The New York Times claims, “There are signs Mr. Trump would like to focus on fiscal policy and leave the Fed to its devices, David Malpass, who is leading Mr. Trump’s economic transition team, said in an email that there had been too much focus on the direction of monetary policy.”

There is tension between the Fed and Trump. Whatever happens, let us hope that policies are made for the greater good of the nation’s economy and not for political reasons.  

 

 

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