The Fed is trying to stay above politics. But there is a lot at stake for the central bank on election day. (Video)

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The Federal Reserve and Chairman Jerome Powell have a lot riding on Tuesday’s election, even as the central bank spent 2024 keeping as much distance as possible from politics.

The next president is set to fill several open positions and, with Powell’s tenure at the helm of the central bank ends in May 2026, he or she will also be able to choose the next face of US monetary policy.

Perhaps the key question, as Kamala Harris signals a more elevated approach to the status quo if she wins, is whether Trump would deliver a deeper level of disruption than what he presented in 2017-2021.

During his first term, then-President Trump attacked Powell regularly and pushed for the actions he wanted, even once. suggesting negative interest rates.

And he signaled that he could go further if he has a second term in office.

It’s “an important bifurcation for the institution,” Mark Spindel, chief investment officer at Potomac River Capital and also a Fed and policy historian, noted in a recent interview.

He added that Trump’s team clearly “will be very hands-on” if they win.

Fed policymakers will also have a chance to discuss the implications this week when the Federal Open Market Committee meets in DC on Wednesday and Thursday, with Powell at the helm.

The main topic for Fed officials will be whether to make the second rate cut in 2024 — with markets pricing in a 25bp discount this week — but surely the political consequences will be on their minds as well.

For Trump, a question of how far he will go

It is unclear whether Trump will openly threaten the Fed’s independence if he wins, but a Trump victory would immediately inject massive uncertainty, in part because of the many mixed signals he has sent.

He talked about what he sees as his authority to fire Powell, but then downplayed the notion. He said he wanted to a “say” in setting interest rates but then immediately returned to that comment.

He also offered varying levels of antagonism to September’s jumbo rate cut, saying the latest in early October it was “too big a cut and everyone knows it was a political maneuver”.

Trump’s allies have floated a number of other ideas that could inject new uncertainty, including new controls on the Fed that would be possible without even firing Powell.

The varied notions remained a top topic of conversation in the nation’s capital. The Washington Post recent reported — less than three weeks before the election — on another idea among Trump aides: demoting Michael Barr, the Fed board member responsible for regulating the largest US banks.

Perhaps the only thing that was clear is that there would be a heated debate among Trump’s allies about how far to go to bring more politics into a central bank that has long tried to rid itself of it.

“Agree or disagree, we should have America’s elected leaders contribute to the most important decisions facing our country,” said vice presidential nominee JD Vance. he said on CNN in August.

He added – in a comment that raised eyebrows – that his view was that monetary policy “should essentially be a political decision”.

Trump was also clear that, despite initially elevating Powell to his current perch, that no third term would be on the cards if he wins. And Trump loyalists already have they had been playing for monthsas a result.

Most of the names include figures who have surrounded Trump for years on economic policy — from former Fed governor Kevin Warsh, who was on the shortlist last time, to Kevin Hassett, who worked in the White House as Trump’s senior adviser.

Warsh was recently jokingly introduced as the “president-elect” during an appearance on CNBC and suggested he would seek a change of course if selected, lamenting the Fed’s recent September interest rate cut and suggesting the bank looks “like it’s going to blow”.

Hassett recently took a different viewtelling the Financial Times that September’s rate cut was justified by evidence of a weakening labor market.

A longtime contender is former Fed nominee Judy Shelton, who has been a very strong Trump booster throughout the campaign. An attempt by Trump to choose his last date was blocked by the Senate. But it did not prompt her to drop her criticism of the central bank.

During a recent appearance with Yahoo Finance, she went the furthest of all, calling the Fed political and saying it could change the election.

A pledge by Kamala Harris to ‘never interfere’

Meanwhile, Harris beckoned to him would take a more hands-off approach, at least until it’s time to elect new governors.

“The Fed is an independent entity, and as chairman, I would never interfere in the decisions that the Fed makes,” she. he told reporters in August.

The The Biden White House has also often highlighted the Fed’s independence as a way to calm the markets and also send a message to Wall Street about how a Trump return to the Oval Office could be very different.

A recent one blog post from the White House Council of Economic Advisers focused on “the importance of an independent central bank.”

It echoed an argument often made by independent economists which points out that history shows that political interference in monetary policy has long been a recipe for negative economic outcomes.

Harris also hasn’t given much indication of who he might choose if he wins, with speculation centering on whether he would seek moderate or more left-leaning candidates.

A centrist candidate could be in the mold of Powell, a registered Republican who has nevertheless been tapped by Presidents Obama, Trump and Biden for various posts. Harris offered Powell compliments even after she voted against his confirmation as Fed chair in 2018.

More center-left candidates could be in the mold of Lael Brainard, who served as Powell’s deputy at the Fed before leaving the 2023 campaign to serve as Biden’s top economic adviser in the White House.

As for Powell himself, “I have a feeling this one’s for Jay,” Spindel said, adding of a possible soft-landing economic scenario that “if he can land that bird, like (Sully) Sullenberger on the river Hudson and recover inflation. under control, I think he will declare victory and retire.”

Finally, even with monetary policy is unlikely to influence many votes with surveys often show little awareness of even the central bank’s role, which candidate voters get to select on Tuesday will have a huge impact on their main issue: inflation.

But Spindel added that politicians looking to intervene might want to be careful what they wish for.

He has studied political interactions with the Fed for several decades, and “the beauty of the design of Congress was that the legislature designed this entity to insulate itself from blame.”

But the more a president like Trump gets involved, he said, “the more obviously you’re going to be at fault.”

Ben Werschkul is the Washington correspondent for Yahoo Finance.

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