As the 2024 presidential election draws closer, the Federal Reserve finds itself in the spotlight, as it often does during election seasons. The critical question on everyone’s mind is whether the Fed will take action if the economic situation teeters on the edge. Federal Reserve chairs consistently assert that their decisions are made solely based on what is best for the economy, rather than being influenced by the election cycle. If one were to examine the transcripts of their meetings, there would be no mention of the upcoming election. It simply isn’t part of their mandate. However, inflation remains a top concern for U.S. adults, as a survey from May 2024 indicates. While stabilizing prices traditionally falls within the Fed’s purview, rather than the President’s, the proximity of elections often brings the Fed’s actions under scrutiny.
The Fed’s Independence
The Federal Reserve was established to operate independently of political influence, a principle that has been a cornerstone of its operations. Members of the Board of Governors are appointed to 14-year terms to safeguard their ability to make independent judgments, free from immediate political pressures. Despite this, the process of appointing Fed members has become increasingly politicized in recent years. For instance, in 2024, the seven governors on the Federal Reserve Interest Rate Committee included four nominees from President Biden and two from former President Trump. The chair of the Federal Reserve, Jerome Powell, was confirmed by leaders from both parties, underscoring the non-partisan nature of the role.
While the Fed chair is typically reappointed across different administrations, reflecting a measure of continuity, the growing politicization of appointments poses a challenge to the Fed’s independence. Nevertheless, studies have shown that greater independence from the Fed generally leads to better monetary policy outcomes. This independence is crucial because it ensures that the Fed can make decisions based on economic needs rather than political expediency.
Political Pressure
The relationship between the Federal Reserve and the executive branch has not always been free from political pressure. A notable historical example is President Richard Nixon’s influence over Fed Chair Arthur Burns. Nixon appointed Burns in 1969, expecting him to be a loyalist to the Republican Party. This relationship culminated in a conversation in December 1971, where Burns informed Nixon of a reduction in the discount rate—a move Nixon approved, emphasizing the need to “kick them in the rump.” Nixon’s interference, including imposing artificial controls on wages and prices, contributed to his landslide victory in the 1972 election. However, the aftermath was disastrous: once price controls were lifted, inflation surged, leading to one of the worst periods of economic instability in U.S. history.
Political pressure on the Fed for short-term gains often leads to long-term problems. For example, while lowering interest rates might stimulate the economy temporarily, it can also drive inflation if not done judiciously. Such was the case during Nixon’s presidency, where the economy initially appeared to thrive, only to suffer severe inflation later. This episode serves as a cautionary tale about the dangers of allowing political motives to influence the Fed’s decision-making.
Despite the Fed’s design to be insulated from political influence, there have been instances where it has succumbed to pressure. During his presidency, Donald Trump openly criticized the Fed for maintaining a tight policy, which some studies suggest led to the Fed lowering rates more than it otherwise would have. This raises concerns about how future presidents might attempt to exert influence over the Fed, particularly given the current fiscal challenges facing the United States.
The 2024 Election
The state of the economy will undoubtedly be a significant factor in the 2024 presidential election. As of now, the Federal Reserve has taken a cautious approach to adjusting interest rates, mindful of the ongoing inflationary pressures. While inflation has been steadily decreasing, from a high of 9% down to 3%, the Fed remains vigilant, recognizing that the effects of interest rate changes often take time to manifest.
President Joe Biden has pledged to respect the independence of the Federal Reserve, a stance that contrasts with reports of former President Donald Trump’s allies drafting proposals to undermine this independence. Trump, during his time in office, was vocal in his criticism of the Fed, arguing that it kept monetary policy too tight. The possibility of Trump returning to office with plans to exert more direct control over the Fed is a point of concern for many economists and political observers.
The campaigns for both Biden and Trump have remained relatively quiet on this issue, but the implications of their potential actions are significant. The use of low interest rates combined with heavy government spending has historically led to economic instability in other societies. The framers of the U.S. Constitution were deliberate in their decision to vest the power of the purse in Congress, not the president, to avoid the pitfalls of centralized control over the economy, akin to the abuses seen in European monarchies.
As the 2024 election approaches, the Federal Reserve will likely continue to walk a tightrope, striving to fulfill its mandate of stabilizing prices and maximizing employment without becoming entangled in the political fray. Ideally, the Fed would operate as it always has, independent of the election cycle, making decisions based solely on economic indicators rather than political considerations. However, the pressures of an election year and the potential for future presidential interference loom large, making the Fed’s role in this election season one of the most closely watched in recent history.
