WASHINGTON — Following his election campaign, President-elect Donald Trump pledged that his financial policies would help lower borrowing rates and ease the monetary strain on American families.

However, many economists predict that interest rates will remain high, significantly above the lows seen before the pandemic. Should this scenario play out, Trump might shift the blame to the Federal Reserve, particularly its chair, Jerome Powell, who Trump appointed during his initial term. Throughout his first presidency, Trump openly criticized Powell and the Fed, arguing that they were maintaining excessively high interest rates. These public criticisms sparked concerns about potential political interference in the Fed’s policy decisions.

In a recent statement, Powell reiterated the essential nature of the Fed’s independence, asserting, “That gives us the ability to make decisions for the benefit of all Americans at all times, not for any particular political party or political outcome.” Potential political confrontations seem likely in the upcoming years, as Trump’s agenda includes significant tax cuts and imposing high tariffs, which are believed to be inflating economic conditions that are already nearly at their capacity. Should inflation increase again, the Federal Reserve would be compelled to keep interest rates elevated.

Concerns arise over the likelihood of Trump clashing with Powell, primarily because Powell may not reduce rates as aggressively as Trump may hope. Additionally, Trump’s own policies could artificially inflate other borrowing costs, such as those for mortgages, irrespective of any cuts from Powell. The high tariffs Trump plans to implement could further exacerbate inflation, while tax reductions targeted at workers—including gratuities and overtime—could accelerate economic growth, generating additional inflationary pressure. This scenario would likely force the Fed to either halt rate cuts or even increase rates should inflation continue on its upward trajectory.

“The likelihood of a discord between the Trump administration and the Fed is exceedingly high,” stated Olivier Blanchard, a former chief economist at the International Monetary Fund. He expressed concern that if the Fed raises rates, “it will obstruct the goals of the Trump administration.”

Is the Federal Reserve already implementing rate cuts? Yes, but given the country’s unexpectedly strong economy, policymakers at the Fed may only decide to cut rates a couple more times—fewer than what was predicted just a little while ago. Moreover, these rate reductions may have a minimal impact on borrowing costs for consumers and businesses. Although the Fed’s short-term rate can influence loans for credit cards and small businesses, it doesn’t directly control long-term rates, including the yield on the 10-year Treasury note, which plays a significant role in determining mortgage rates. This yield is largely shaped by investors’ perceptions of future inflation, economic activity, and interest rates, as well as by supply and demand dynamics for Treasury securities.

For instance, earlier in the year, the 10-year yield decreased in anticipation of Fed rate cuts. However, following the Fed’s first cut on September 18, longer-term rates began to rise again, reflecting expectations of stronger economic growth.

Trump’s proposals for various tax cuts could potentially widen the federal deficit, which may create a requirement for Treasury rates to increase to attract buyers for the new debt. Kent Smetters, an economist at the Penn Wharton Budget Model, highlighted, “I genuinely believe that the Fed does not have substantial control over the 10-year rate, which is crucial for mortgages. Deficits are going to be a much more significant factor in that respect.”

So what happens if Trump confronts Powell? While it’s not problematic for the economy if a president critiques the Fed chair occasionally, prolonged criticism could undermine the Fed’s independence, which is vital for maintaining control over inflation. In order to combat inflation, a central bank might need to take actions that could be unpopular, such as raising interest rates to limit borrowing and spending. Political leaders often desire the opposite: low rates to bolster the economy and employment, especially in the lead-up to elections. Studies indicate that countries with independent central banks tend to experience lower inflation rates.

Even if Trump does not overtly compel the Fed to act, ongoing criticism may still pose challenges. If market participants, economists, and business leaders begin to perceive that the Fed is not acting independently but rather responding to presidential pressures, confidence in the Fed’s inflation-controlling capabilities may diminish. When consumers and businesses anticipate rising inflation, they typically change their behavior in ways that drive prices higher, such as advancing purchases before price increases or raising their own prices in anticipation of increased costs.

“The markets need assurance that the Fed is answering to economic data, not succumbing to political pressure,” remarked Scott Alvarez, a former general counsel at the Fed.

Could Trump dismiss Powell? While he may attempt this, it likely would spark a prolonged legal dispute, potentially escalating to the Supreme Court. In a news conference in November, Powell asserted that he believes the president lacks the legal authority to terminate him. Most analysts agree that Powell would likely prevail in legal proceedings, and from the perspective of Trump’s administration, this conflict might not be worthwhile. Powell’s term extends until May 2026, allowing the White House to select a new chair at that point.

Additionally, it’s probable that the stock market would react adversely if Trump were to make such a drastic maneuver. Rising bond yields would likely follow, raising mortgage rates and other borrowing costs. Should Trump be viewed as appointing a loyal ally to replace Powell in 2026, the financial markets might also respond negatively.

Have other presidents criticized the Fed before? Yes, and in some severe instances, this has led to persistently high inflation rates. A notable example is President Richard Nixon, who pressured Fed Chairman Arthur Burns to lower interest rates in 1971 during a reelection campaign, leading the Fed to comply. Economists argue that Burns’ inability to maintain higher rates played a notable role in the entrenched inflation of the late 20th century.

Thomas Drechsel, an economist from the University of Maryland, indicated that presidential interference in the Fed’s rate decisions tends to lead to higher prices consistently, which raises concerns about inflation becoming established. Since the mid-1980s, barring Trump’s initial term, presidents have generally refrained from public criticism of the Fed.

“It’s remarkable how little partisan manipulation has occurred within that policy-making process,” commented Peter Conti-Brown, a professor at the University of Pennsylvania’s Wharton School. “This is a true achievement of American governance.”

Are there other nations with independent central banks? Yes, most developed economies maintain independence for their central banks. However, in certain recent instances, like in Turkey and South Africa, governments have tried to influence the interest-rate policies set by these central banks, often resulting in soaring inflation rates. Turkey’s President, Recep Tayyip Erdogan, has been known to pressure the central bank to reduce interest rates despite rising prices, going so far as to dismiss three central bankers who opposed him. As a result, inflation soared to 72% in 2022, based on official statistics. Last year, Erdogan finally reversed his stance, allowing the central bank to raise rates again.