US Federal Reserve independence would be difficult to erode

Fears that President-elect Donald Trump would attempt to fire Federal Reserve Chair Jerome Powell or meddle with the Federal Open Market Committee are overdone. The incoming president will likely have fewer opportunities to reshape the board than during his previous term.

What you will learn:

• Trump’s major opportunity to reshape the Fed won’t come until 2026, when he can select a new board member and make picks for chair and vice chair of supervision and regulation. Nominees would need to be approved by the Senate, which is not a slam dunk.
• We modeled a scenario where the Fed succumbs to political pressure to lower rates, which provides a near-term boost to the economy. Over the longer term, however, higher inflation expectations would weigh on economic growth and push inflation higher.
• The Fed’s credibility could be at risk if it makes similar mistakes to the 1960s, when the Fed chose to not lean heavily enough against inflationary pressures stemming from changes in fiscal policy. That scenario looks less likely after the Fed’s sustained hard pivot toward restrictive policy.