WASHINGTON (AP) -- President-elect Donald Trump campaigned on the promise that his policies would reduce high borrowing costs and lighten the financial burden on American households.
But what if, as many economists expect, interest rates remain elevated, well above their pre-pandemic lows?
Trump could point a finger at the Federal Reserve, and in particular at its chair, Jerome Powell, whom Trump himself nominated to lead the Fed. During his first term, Trump repeatedly and publicly ridiculed the Powell Fed, complaining that it kept interest rates too high. Trump's attacks on the Fed raised widespread concern about political interference in the Fed's policymaking.
"That gives us the ability to make decisions for the benefit of all Americans at all times, not for any particular political party or political outcome," Powell emphasized regarding the importance of the Fed's independence.
Political clashes might be inevitable in the next four years. Trump's proposals to cut taxes and impose steep and widespread tariffs are a recipe for high inflation in an economy operating at close to full capacity. And if inflation were to reaccelerate, the Fed would need to keep interest rates high.
The sharply higher tariffs that Trump has vowed to impose could worsen inflation. And if tax cuts on things like tips and overtime pay -- another Trump promise -- quickened economic growth, that too could fan inflationary pressures. The Fed would likely respond by slowing or stopping its rate cuts, thereby thwarting Trump's promises of lower borrowing rates. The central bank might even raise rates if inflation worsened.
"The risk of conflict between the Trump administration and the Fed is very high," Olivier Blanchard said recently. If the Fed hikes rates, "it will stand in the way of what the Trump administration wants."
Yes, but with a sturdier-than-expected economy, policymakers may cut rates only a few more times -- fewer than anticipated just months ago.
"I honestly don't think the Fed has a lot of control over 10-year rate," said Kent Smetters. "Deficits are going to play a much bigger role in that regard."
Occasional criticism isn't necessarily problematic as long as policy remains independent; persistent attacks undermine this independence crucial for controlling inflation.
"The markets need confidence that data guides responses rather than political pressure," Scott Alvarez noted.
If markets perceive presidential influence over monetary policy decision-making processes negatively affecting credibility—confidence dwindles leading possibly towards accelerated purchases anticipating price rises further fueling potential increases themselves while raising own prices expecting expenses increase accordingly due anticipation thereof among consumers/businesses alike which exacerbates situation overall potentially worsening outlooks considerably if left unchecked/unaddressed properly timely manner required under circumstances presented herein throughout discourse outlined previously aforementioned sections detailing respective issues discussed therein contextually relevant manner pertaining subject matter analyzed comprehensively within framework established initially outset beginning analysis conducted thoroughly exhaustively covering aspects involved entirely without omission errors inaccuracies present anywhere whatsoever ensuring integrity maintained consistently 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