Dive Brief:

• During Donald Trump’s second term as president, 84% of consumers will likely disregard the Federal Reserve’s longstanding assertion of political independence and view the central bank as aligned with the Republican Party, according to a paper published by the National Bureau of Economic Research.
• “Political outcomes, like a Trump presidency, could dramatically realign public perceptions and trust in the Fed,” researchers said in a paper published last month based on a survey of 5,025 “politically representative” consumers in April and May.
• Consumer perceptions of the central bank “affect views on the credibility of the Fed in achieving its dual mandate, and consequently shape inflation expectations,” the researchers said.

Dive Insight:

During his first term as president, Trump often used social media to criticize Fed policymakers, the three academics said. They cited a research finding that social media posts by Trump condemning the Fed influenced interest rate expectations, financial markets and the macroeconomy.

“Trump pressured the Fed to cut interest rates during his presidency and recently accused the Fed of favoring Democrats in its rate decisions to influence election outcomes,” they said.

In an interview before the Economic Club of Chicago on Oct. 15, Trump said that as president he should be able to weigh in on Fed deliberations about borrowing costs.

Referring to decisions about the federal funds rate, Trump said, “I think I have the right to say, ‘I think you should go up or down a little bit.’

“I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether or not interest rates should go up or down,” he said.

For his part, Fed Chair Jerome Powell for years has said in congressional testimony and other public comments that U.S. interests are best served when the Fed is independent from political influence and focuses on its dual mandate to ensure price stability and maximum employment.

For example, two days after the contested general election in 2020, Powell declined to comment on the ultimate outcome.

“I’m very reluctant, as you will imagine, to comment on the election directly, indirectly, at all, other than just to say that it’s a good time to take a step back and let the institutions of our democracy do their jobs,” Powell said at a Nov. 5, 2020, press conference.

At a press conference on Thursday, after a two-day meeting of Fed officials, Powell may be asked to comment on the outlook for Fed independence during Trump’s second term.

Traders in interest rate futures see 99% odds that policymakers on Thursday will cut the benchmark interest rate by a quarter point, according to the CME FedWatch Tool.

Congress created the Fed with several buffers against short-term political interference, including self-funding and the long, staggered terms of its board of governors, the three researchers said.

At the same time, most consumers believe that the Fed bows to partisan pressure, they said.

Sixty-six percent of “Democrat-leaning” respondents to the survey believe the Fed favors Republicans, while 60% of Republican-leaning respondents believe it favors Democrats, the researchers said.

“Our findings reveal significant public disagreement regarding the Fed’s perceived political leanings,” they said.

The perceptions of consumers toward the central bank “play a critical role in shaping their macroeconomic expectations, trust in the Fed and how they acquire and process economic information.”

The NBER paper was written by Pei Kuang, an associate professor economics at the University of Birmingham, Michael Weber, an associate professor at the University of Chicago’s Booth School of Business, and Shihan Xie, an assistant professor at the University of Illinois at Urbana-Champaign.