Will Trump attack US central bank independence?

ANALYSIS – In the polls for the American presidential elections, Joe Biden and Donald Trump are moving closer together in April, which is good news for the incumbent president. He was lagging behind for a long time.

Trump has been in the news in recent weeks mainly from a court in New York, where he has to defend himself against a charge of paying hush money to porn star Stormy Daniels. On the other hand, Biden faces lower economic growth rates in the US and persistent inflation.

The American economy grew much less than expected in the first quarter of 2024 and inflation was much higher than expected. Gross domestic product grew by 1.6 percent annually from January to March, while economists had expected 2.4 percent growth.

This continues the downward trend, as growth in the American economy reached 4.9 percent in the third quarter of 2023 and 3.4 percent in the last quarter.

The slowdown in growth in the US has so far had little impact on the US dollar. It is performing relatively strongly this year compared to other major currencies such as the euro, the British pound and the Japanese yen. This is partly because interest rates in the US have remained relatively high, but rising tensions in the Middle East are also playing into the hands of the dollar. The American currency is seen as a safe haven.

The result of the strong dollar is that US businesses benefit from relatively cheap imports, but at the same time the expensive dollar puts pressure on American exports.

Stubborn inflation is a problem for Joe Biden

In principle, cheaper imports have a downward effect on inflation in a country. But that is not yet sufficient to moderate domestic price pressure in the US. US inflation even reached its highest level in six months in March. On average, prices of goods and services rose 3.5 percent on an annual basis. And this puts the American central bank in a dilemma.

To stimulate the economy, you would expect the Federal Reserve to lower its policy interest rate. But the central bank also wants to prevent prices from rising further. The latter argument seems to prevail, now that interest rate cuts are only expected from September. Moreover, analysts expect that the Federal Reserve will reduce its policy interest rate less sharply this year than previously expected.

That prices in the US are rising again, something that the average American will immediately notice in their wallet. And President Biden is being blamed for this, especially because wages are not rising sufficiently. This could break the Democratic candidate heading into November 5.

Will Trump attack US central bank independence?

Biden should therefore not be dissatisfied with the fact that Donald Trump has not further expanded his lead in the polls. Biden may even be able to use economic arguments against Trump in the electoral battle.

Trump advisors are reportedly working on plans to put the US central bank under the White House’s control, which would jeopardize the independence of the Federal Reserve. According to business newspaper The Wall Street Journal, Trump’s allies want to propose, among other things, that the president should be consulted on interest rate decisions by the central bank.

If Trump were to implement such a plan after winning the November elections, the consequences for US monetary stability would be dire. For example, it could threaten the Federal Reserve’s goal of keeping inflation around 2 percent.

The independence of the central bank is an important pillar in any modern democracy. Trump supporters will applaud any plans to challenge this position. After all, many of them distrust any form of authority.

American voters who have not yet made a choice between Trump and Biden may be inclined to interpret such an extreme position differently and prefer a stable financial and economic system. Biden will certainly bring this up in his re-election campaign.

Joey van Hanegem is a currency expert at Ebury