The Independence of the Federal Reserve During the Trump Presidency: An Ethical Analysis
Hayley Siegel
Abstract: An analysis using the utilitarian method, backed by quantitative data and qualitative observations, supports the ethical argument for the Federal Reserve remaining independent of the US President to make sound decisions on behalf of its citizens. We have reasons to justify that the Fed’s decision to raise interest rates – made independently and without political motivation – is the best possible choice from a utilitarian standpoint because such independent decisions improve the economy as whole and provide the greatest benefit for the greatest number of people.
Introduction
On July 19 and October 10, 2018, President Donald Trump expressed disapproval of the Federal Reserve’s decision to raise interest rates, claiming that he’s “not thrilled” and the Fed had “gone crazy” with policy in interviews with CNBC and the media (cnbc.com). On July 20, he tweeted further condemnation of the Fed, claiming the central bank’s shift towards monetary tightening would only negate the effort of his administration to promote economic expansion. This move to control the Fed comes on the heels of the Fed’s recent interest rate hike from 2.0 to 2.25 percent in September. In the following paper, I suggest Donald Trump overstepped Presidential boundaries by attempting to influence the Fed’s decisions. Trump’s politically-charged rhetoric is a form of manipulation of the Federal Reserve that impinges on the institution’s necessary independence from the Federal government.
Thankfully the Fed – led by chairman Jerome Powell – seems to have ignored the President’s pointed commentary and refused to give in to his veiled demands to keep interest rates low. Although interest rates were held steady at the Federal Open Market Committee meeting on August 1, there was a hike in interest rates on September 26 (cnbc.com).It remains to be seen if Trump will continue to seek control over the Fed and what if any affect his criticism will have on its future economic policy decisions.
To Raise or Not to Raise
The decision of the Federal Reserve to raise interest rates is related to the current economy’s inflation rate. Interest rates reflect the amount charged by lenders to borrowers. Inflation is the increase of prices for goods and services over time; when inflation occurs, the purchasing power of a unit of currency begins to fall (howstuffworks.com).
The pattern of raising and lowering interest rates moves in a cycle that reflects the overall state of the economy. When the economy is recessionary, demand is low relative to supply. The Fed will choose to lower interest rates in order to stimulate economic growth; the greater availability of money will increase demand by encouraging business investments and consumer spending. Conversely, when the economy is booming, inflation will begin to rise as demand exceeds production levels. While inflation is not necessarily bad, an overinflated economy can be dangerous. When the government prints too much currency, production costs rise, driving up final costs to consumers who can no longer afford to support businesses (sciencing.com). If rising prices and a rising inflation rate become worrisome, the Fed will choose to step in and raise interest rates to curb inflation.
The Fed typically aims for a 2 percent inflation rate. According to the central bank, this is the ideal rate to maintain maximum employment and price stability. A higher inflation rate would lead to problematic inflation. Meanwhile, a lower rate potentially engenders deflation, the falling of prices for goods, services, and wages, which indicates a weaker economy (federalreserve.gov). The present US economy is in an inflationary state and is continues to be strong. Second quarter GDP in the US was 4.2 percent, while third quarter GDP declined to 3.5 percent, which is still high compared to the usual 2 to 3 percent. Recent trends also suggest the inflation rate will continue to rise in the coming months if left unchecked. According to the latest measurements, as of June, the inflation rate is at 2.87 percent. This is the highest it has been since 2013 (inflationdata.com). Thus, it makes perfect sense for the Fed to begin raising interest rates in the coming months to prevent excessive inflation.
