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There’s nothing more Trump-like than saying, “Hello, I am the President. I got power. Lots of it. And I will tell the Fed what to do with its monetary policy”.

But that’s exactly what Donald Trump did.

There is a high chance that Trump will be the next American president. And one of his policy promises? To influence how the Federal Reserve increases or decreases interest rates.

If you are a regular person on the street, you might think, “What’s wrong with that? He’s the president”. However, for economists, this is a disaster in the making and shows the state of economics and politics in the United States.

For a central bank to work, it has to have independence. Let me elaborate.

A central bank’s job is to

1: Maximise economic growth and

2. Keep inflation low and stable.

It does this through interest rates. When it wants to reduce interest rates, it will buy a lot of government bonds from the hands of regular people like us. In turn, we will take that cash from the government and spend it.

Demand gets stronger, businesses can sell more, and the economy gets stronger. But it also comes with inflation. More demand equals more inflation. When inflation is high, we can’t afford most things and our cost of living goes up.

So, a central bank like the Federal Reserve tries to balance this.

Now, what if I tell you the President of the United States have this big government project he wants to do? He wants to issue government bonds.

He goes to the Fed and asks them to buy them. Technically, the Fed can ‘print money’ to buy. But the central bank realizes this ‘problem’. A president can finance his pet white elephant projects with all this ‘free money’ from the Fed.

So, it says no.

But now, the President says “I am in charge. I have the right to tell you what to do. Or you are fired.” So, he fires the Fed president and appoints someone who will follow what he says.

See the problem here?

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