Quick Overview

  • According to a paper published by the National Bureau of Economic Research (NBER), during Donald Trump's second presidential term, 84% of consumers may no longer heed the Federal Reserve's long-standing claims of political independence, instead viewing the central bank as aligned with the Republican Party.
  • "Political outcomes, such as Trump's election as president, could significantly reshape public perceptions and trust in the Fed," the researchers said in a paper published last month, based on a survey of 5,025 "politically representative" consumers conducted from April to May this year.
  • The researchers said that consumers' views of the central bank "affect their judgments about the credibility of the Fed's ability to achieve its dual mandate, and in turn shape inflation expectations."

In-Depth Analysis

The three scholars noted that during Trump's first term, he frequently used social media to criticize the Fed's policymakers. They cited a study showing that Trump's social media posts condemning the Fed influenced interest rate expectations, financial markets, and the macroeconomy.

"Trump pressured the Fed to cut interest rates during his presidency and recently accused the Fed of favoring Democrats in its rate decisions to influence election outcomes," they said.

In an interview at the Economic Club of Chicago on October 15, Trump said that as president, he should have the right to weigh in on the Fed's deliberations regarding borrowing costs.

Discussing federal funds rate decisions, Trump said, "I think I have the right to say, 'I think you should go up a little bit or down a little bit.'"

"I don't think I should be allowed to order it, but I think I have the right to comment on whether rates should go up or down," he said.

As for Fed Chair Jerome Powell, he has said for years in congressional testimony and other public appearances that U.S. interests are best served when the Fed is free from political influence and focused on its dual mandate of ensuring price stability and maximum employment.

For example, two days after the contentious 2020 election, Powell declined to comment on the final outcome.

"As you can imagine, I'm very reluctant to comment directly or indirectly on the election, or even to mention it. I'll just say that this is a good time to step back and let our democratic institutions do their work," Powell said at a press conference on November 5, 2020.

At a press conference following the Fed officials' two-day meeting on Thursday, Powell may be asked about his views on the prospects for Fed independence during Trump's second term.

According to the CME Group's FedWatch tool, interest rate futures traders see a 99% probability that policymakers will cut the benchmark rate by 25 basis points on Thursday.

The three researchers said that when Congress created the Fed, it built in several buffers to prevent short-term political interference, including self-financing and long, staggered terms for board members.

Meanwhile, most consumers believe the Fed succumbs to partisan pressure, they noted.

In the survey, 66% of "Democrat-leaning" respondents thought the Fed favored Republicans, while 60% of Republican-leaning respondents thought the Fed favored Democrats, the researchers said.

"Our findings reveal significant divergence in public perceptions of the Fed's political leanings," they said.

Consumers' views of the central bank "play a key role in shaping their macroeconomic expectations, trust in the Fed, and the way they acquire and process economic information."

The NBER paper was co-authored by Kuang Pei, associate professor of economics at the University of Birmingham, Michael Weber, associate professor at the University of Chicago Booth School of Business, and Shihan Xie, assistant professor at the University of Illinois Urbana-Champaign.