Summarize this content to 2000 words in 6 paragraphs President-elect Donald Trump is planning to retake the White House with a bold set of promises, including lower interest rates.US households have grown frustrated with two years of high borrowing costs. But the president doesn’t have the power to reduce mortgage rates, credit card APRs or rates for business loans. Interest rates result from a combination of economic factors, including the Federal Reserve’s monetary policy.The Fed — the country’s central bank — began gradually lowering its benchmark interest rate during the fall. The Fed’s chief decision-making body meets again next week, with another projected quarter-percentage cut on the agenda. While Trump will have the power to appoint a new Fed chair in 2026, he does not have the ability to set monetary policy or change the federal funds rate directly.There’s a long history of presidents trying to interfere in the central bank’s autonomy. During his first presidency, Trump threatened to remove Fed Chair Jerome Powell after the Fed started hiking interest rates. More recently, the president-elect said he won’t try to fire Powell before the end of the Fed chair’s term in 2026. Smart Money Advice on the Topics That Matter to You CNET Money brings financial insights, trends and news to your inbox every Wednesday. Here’s a breakdown of what Trump can and can’t do regarding interest rates and the Fed.Who determines interest rates?The Federal Reserve sets the federal funds rate, a benchmark interest rate that banks pay to borrow money. This target interest rate range indirectly influences the short-term rates that banks and lenders will later charge customers on everything from credit cards to home and auto loans. Smart Money Advice on the Topics That Matter to You CNET Money brings financial insights, trends and news to your inbox every Wednesday. The Fed lowers and raises its benchmark rate to keep prices relatively stable (with an ideal 2% annual inflation rate) and 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 address rapid inflation.What is the relationship between the Fed and the government?The Federal Reserve was created by Congress in 1913 with the Federal Reserve Act. Congress can amend the Act to alter the way the Fed operates. The president’s primary relationship with the Fed is through his power 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 doAppoint 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. What power does Trump have 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.” Powell’s term ends in 2026, and the president likely does not have the power to remove Powell before then. When asked in early November if the president could fire or demote the Fed chair or other Fed governors, Powell replied, “Not permitted under the law.” According to Earle, members of the Federal Reserve Board can be removed only “for cause,” which means proven misconduct or malfeasance or inability to do the job as a result of illness. Simple disagreements over policy or presidential frustration over interest rates are not enough on their own. “Those are not valid grounds for removal,” Earle said.Presidents do have another, if unofficial, power over the Fed: the bully pulpit. Some presidents have been known to rail against the Fed when the economy is bad, pressuring them to take one action or another. Trump himself did this during his first term by threatening to remove the Fed chair when the economy nearly crashed in March 2020. Experts agree that Trump is likely to make those kinds of comments again.”I don’t think anyone expects presidents, especially during today’s period, to fully tie their hands behind their back,” Binder said.Is the Fed really nonpartisan and independent? In theory, the Fed is independent, but in practice, that’s not always the case. According to Earle, it’s almost impossible for an entity so important as the Fed to be totally above politics. 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 future interest rate cuts? Experts say it’s unlikely Trump’s broader economic policies would lead to faster or deeper interest rate cuts. In fact, they might have the opposite effect.Trump’s proposals for tariffs on foreign imports are likely to cause more inflation, which could then influence the Fed to raise interest rates again as it often does to combat inflation, according to Dean Baker, a senior economist at the Center for Economic Policy and Research.But experts say Trump’s biggest impact may be the sheer uncertainty he inspires, which can rattle financial markets. His freewheeling policy pronouncements often shake policymakers who are unsure exactly which direction he might take. Trump’s threats to fire Powell, regardless of whether he does (or can) follow through, just add instability to the mix. Related articles about the Fed
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