What did Harris and Trump say about interest rates? What you should know before an important Fed decision.
Top line
As the Federal Reserve convenes for one of its most consequential meetings in recent history, here’s what the presidential candidates have said about the Fed and its interest rate management during the campaign. While former President Donald Trump was much more outspoken, Vice President Kamala Harris’ allies were not entirely shy about calling for action.
Donald Trump (left) and Kamala Harris shake hands.
Key data
The idea of the Federal Reserve being independent from other branches of government has not stopped politicians from expressing their opinions about what the Fed should do, namely regarding interest rates.
Interest rates can become a controversial issue in the election campaign, as lower interest rates are far more popular because they can improve personal finances through cheaper mortgages and lower interest rates on student loans and small business loans.
Trump addressed the Fed, noting that interest rates are higher than ever in the country’s history. He promised that the Fed would make “sharp cuts” in July if he takes office. He suggested that the Fed would be making a politically motivated decision if it cut rates before the November election. He told Bloomberg that such a move by the Fed would be “something they know they shouldn’t be doing.”
In August, Trump caused further controversy when he announced that the president should have a “say” in Fed decisions, saying he was uniquely qualified to do so because he had “made a lot of money” and “had better instincts than … people in the Federal Reserve or the chairman.” However, Trump later walked back his stance, saying Fed officials did not need to “listen” to him.
Harris has been largely silent on the Fed, responding to Trump’s first hint in August by reiterating that the Fed is an “independent institution” and promising to “never interfere with the Fed’s decisions” if she is elected president.
But other influential Democrats also entered the territory of the Fed’s couch commentators, including President Joe Biden, who said in March that he was “betting” that rates would “go down,” and Senators John Hickenlooper, Elizabeth Warren and Sheldon Whitehouse, who urged Fed Chairman Jerome Powell in a letter on Monday to cut rates by a drastic 0.75 percentage points.
What does the Federal Reserve do?
Arguably the most important function of the Federal Reserve is setting the federal funds rate, the interest rate on capital reserve transactions between financial institutions, which is set by a panel of Fed officials called the Federal Open Market Committee. The federal funds rate is often generically referred to as just the interest rate because it has an outsized influence on most U.S. credit, from corporate bonds to new auto loans. The bank has historically operated independently from the rest of the federal government and is guided by a “dual mandate” to minimize inflation and maximize employment, meaning its goal is to put the U.S. economy on a long-term growth path. The Fed typically raises rates when inflation is too high, as it did in 2022 and 2023, and cuts rates when there is a risk of a serious economic downturn, as it did in early 2020 during the COVID-19 lockdowns. In addition to pursuing its monetary policy objectives, the Fed also regulates commercial banks and controls how much money is in circulation.
What influence does the president have on interest rates?
In theory, little to nothing, as the Fed prides itself on its independent decision-making. However, the president appoints the Fed’s seven governors and the Senate confirms them. They have permanent seats on the 12-member Federal Open Markets Committee. Biden appointed four of the Fed governors, but Trump appointed Powell to the top job of central bank governor, which he has held since 2018.
News Peg
One of the Federal Open Market Committee’s eight annual meetings is on Tuesday and Wednesday, the last before the Nov. 5 election. Opinions are unusually divided on what to expect from the Fed. The market-implied probabilities of the Fed’s decision are more uncertain than at any time since Bank of America began studying this metric in its research. Derivatives trades tracked by CME Group are pricing in about a 65% chance of a 50 basis point cut on Wednesday and a 35% chance of a 25 basis point cut (the 75 basis points suggested by Warren is not very likely). But the market-implied odds of a cut of at least 0.25 percentage point are firmly at 100%, meaning Wednesday’s first rate cut since March 2020 is all but certain.
tangent
Project 2025, the controversial policy roadmap of Trump’s allies – although Trump denies his involvement in the project – calls for a significantly downsized Fed. It even outlines a scenario in which the central bank is “effectively abolished” in favor of a much more laissez-faire approach.
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