The political pressure on the Fed
Raising rates might nonetheless be the consequence of the President trying to pressure the Fed into reducing them. If this did/does produce a higher probability of lower rates in the minds of market participants, higher rates would be necessary to choke off the lower longer term real rates, anticipated higher spending and inflation that would follow. Tighter policy would be needed until enough evidence has accumulated for those who had up-weighted the event that the Fed would cave in to revise their expectations again.
Will the Fed Trump the President or vice versa?
By: Tony Yates – University of Birmingham
Public vs private pressure on the Fed
The Fed has been quite successful in ignoring public pressure from elected officials. But in late 1960’s the Fed bowed to private pressure coming from the White House and pushed the unemployment rate to a 15 year low, a policy that resulted in double-digit inflation.
What Is the White House Whispering to the Fed?
By: Narayana Kocherlakota – Rochester University
The Trump administration might have already influenced the Fed
After the financial crisis the Fed switched from a corridor-like operating system to a floor operating system: it started paying interest on excess reserves (IOER) at a rate higher than going short-term market interest rates. President Trump’s large budget deficits, financed by Treasury bills, are pushing short-term rates upward contributing to the narrowing of the IOER-market rate spreads and causing pressure on the Fed’s floor system. Trump administration’s fiscal policies could then compel the Fed to rethink its floor system.
Donald Trump’s Real Influence on Fed Policy
By: David Beckworth – George Mason University
