As US households have been hit by years of high borrowing costs, President Donald Trump rode into office with a bold pledge to lower interest rates.
Last week, he took a dig at the Federal Reserve, saying, “I’ll demand that interest rates drop immediately.”
Except there’s virtually no chance the Fed’s rate-making body will cut rates today. And it might not for months.
The country’s central bank began gradually lowering its benchmark interest rate last year as inflation appeared to be steadily easing. But there’s too much uncertainty and less urgency, especially with increased inflationary pressures and a seemingly resilient labor market, for the Fed to carry out a fourth consecutive cut at today’s meeting.
While Trump will be able to appoint a new Fed chair in 2026, he does not have the ability to set monetary policy or change the federal funds rate. No president has the direct power to reduce mortgage rates, credit card APRs or business loan rates.
In reality, economic data plays the starring role here. If inflation gets under control (ideally running at 2% annually) or the job market becomes significantly weaker, the Fed would have a mandate to lower interest rates. Given how stubborn prices are now, most economists don’t forecast an interest rate cut until May or June at the earliest.
Here’s a breakdown of what Trump can and can’t do regarding interest rates and the Fed.
Who actually sets interest rates?
The Federal Reserve sets the federal funds rate, which banks pay to borrow money overnight. This benchmark interest rate influences the rates that banks and lenders charge customers on everything from credit cards to home and auto loans.
The Fed lowers and raises interest rates to stabilize prices and keep unemployment low, according to Peter C. Earle, a senior economist at the American Institute for Economic Research.
To understand how this works in practice, think back to the early days of the COVID-19 pandemic. When the economy was cratering in 2020, the Fed dropped interest rates to zero, hoping to encourage spending and investing at a time when people and businesses would otherwise be hesitant. Then, when the economy bounced back two years later, the Fed raised interest rates to tame rapid inflation.
What relationship does the Fed have with Congress?
The Federal Reserve was created by Congress in 1913. Congress can amend the Federal Reserve Act to alter the way the Fed operates, but the president can’t. The president’s primary power is to appoint the Fed chair and other board members.
Presidents often appoint Fed board members who align with their worldviews. However, appointments are staggered so that no one president has the power to totally reshape the Fed, said Sarah Binder, professor of political science at George Washington University.
In theory, Trump could push for changes to the Federal Reserve Act through a Republican-controlled Congress. However, Binder said that any modifications to the rules that govern the Fed would need a bipartisan coalition of 60 votes to pass the Senate.
✅ What the president can do |
❌ What the president can’t do |
|
Appoint a new Fed chair in 2026 (and appoint Fed chair board members generally when their terms expire) |
Fire the Fed chair over simple disagreements. Fed chairs can only be removed “for cause,” such as misconduct or malfeasance. |
|
Voice concern over monetary policy by publicly criticizing actions of the Fed. |
Directly set interest rates for the country or for banking institutions. |
Does Trump have power over the Federal Reserve?
In 2018, during his first administration, Trump appointed current Fed Chair Jerome Powell. Two years later, Trump called him the “enemy.” When asked in November if the president could fire or demote the Fed chair or other Fed governors, Powell replied, “Not permitted under the law.”
The president can’t remove Powell before his term ends in 2026 simply because of policy disagreements or frustration over interest rate decisions. According to Earle, members of the Federal Reserve Board can be removed only “for cause,” that is, proven misconduct, malfeasance or inability to do the job due to illness.
At the same time, presidents do have unofficial power over the Fed through the bully pulpit. Some presidents have been known to rail against the Fed when the economy is bad, pressuring them to take action. Trump did this in March 2020 by threatening to remove the Fed chair when the economy nearly crashed, and he’s likely to apply that pressure again during his second term.
Is the Fed politically independent?
In theory, the Fed is independent. But in practice, it’s almost impossible for an entity so important as the Fed to be totally above politics, according to Earle.
The Fed has several structures that insulate it from outside influence: lengthy terms for board members, staggered appointment timelines and for-cause removal projections, for example. These all work to allow the Fed some autonomy and protect it from the whims of political leaders. But ultimately, the Fed operates in the middle of the political system.
“It cannot be hermetically sealed,” Binder said.
How will Trump’s policies impact interest rate cuts?
Experts say it’s unlikely Trump’s broader economic policies would lead to faster or deeper interest rate reductions. In fact, most economists predict they’ll have the opposite effect.
Trump’s proposals for tariffs on foreign imports are likely to cause more inflation, which could then push the Fed to raise interest rates again, according to Dean Baker, a senior economist at the Center for Economic Policy and Research.
Perhaps Trump’s biggest impact on rates is the sheer uncertainty he inspires, which can rattle financial markets. His freewheeling pronouncements and executive orders shake investors, who are unsure exactly which direction he might take or what legal pushback he’ll receive.
Trump’s demands to control the Fed, regardless of whether he can follow through, just add more instability to the mix.
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