The Federal Reserve's political independence, a foundation of the central bank's operations for nearly 75 years, is under potential threat as former President Donald Trump has signaled a range of plans to influence monetary policy should he return to office.

In contrast to his opponent, Vice President Kamala Harris, Trump and his campaign have suggested several options to assert more control over the Fed. These include attempting to demote Fed Chairman Jerome Powell, requiring presidential approval for interest rate decisions and ending the Fed's independence on constitutional grounds.

Trump himself has yet to fully endorse any of these ideas, but the mere suggestion of a change to the Fed's independence will likely increase uncertainty in US and global financial markets, could threaten US dollar's status as the world's reserve currency and heighten the odds of another spike in inflation or a recession, economists and market watchers said.

"Simply put, markets would not respond favorably to any appearance of political interference with the Fed's policy process," said Karl Schamotta, chief market strategist at Corpay Cross-Border Solutions.

A say in rates

Any attempt to reduce the Fed's independence would mark the most substantial change to the central bank's relationship with the White House since 1951, when the Fed and US Treasury reached an agreement to separate government debt management from monetary policy.

While Trump has given differing views on his plans for the Fed, he has repeatedly expressed a need for the president to have input on rate decisions.

"I think I have the right to say I think [the Fed] should go up or down a little bit," former president Trump said in an Oct. 15 interview with Bloomberg News. "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 the interest rates should go up or down."

Harris, on the other hand, has expressed no desire to impinge on the Fed's independence.

"The Fed is an independent entity and as president I would never interfere in the decisions that the Fed makes," Harris said in August.

Giving the president influence over rate decisions could lead to politically motivated rate cuts that could boost job growth, lower unemployment and bolster GDP, but also lead to adverse inflation consequences that the next president would be saddled with, said David Wilcox, economist at Peterson Institute for International Economics and Bloomberg Economics.

"Monetary policy has effects over long periods of time that tend not to respect four-year presidential terms," he said. "Because of that lag, the adverse inflation consequences wouldn't be fully felt until the next presidential term. That's the reason why the economics profession is so overwhelmingly in favor of an independent central bank."

If elected, Trump would find himself restricted from stacking the Fed with his own appointees.

Powell has said he plans to finish out his role as chair, which expires in May 2026, but his term as a Fed governor does not expire until 2028. Fed Governor Adriana Kugler, a Democratic nominee, will see her term expire in January 2026, but the other members of the board have terms that do not expire until the 2030s.

Trump could attempt to end the Fed's independence by filing legal challenges arguing that federal agencies independent of the White House are unconstitutional, but that process could take years and would likely be decided by the Supreme Court.

The former president could also attempt to seek more control over rate setting through Congress, but this would require firm Republican control of the House and Senate.

Within the Heritage Foundation's "Project 2025" blueprint, a comprehensive set of conservative policy objectives the Trump campaign has tried to distance itself from, with varying degrees of success, is a chapter calling for sweeping reforms at the Fed.

One objective calls for eliminating the Fed's mandate focused on full employment in the US labor market and shifting the central bank's focus exclusively to price stability. Another calls on elected officials to specify target inflation ranges and make intended growth paths public.

"There should be no more 'flexible average inflation targeting,' which amounts to ex post justification for bad policy," the section, written by a former deputy assistant for domestic policy in the Trump White House, states.

Economic impact

Outside of verbally influencing the Fed, Trump's power over the central bank would initially be extremely limited under current law, said Schamotta with Corpay.

"If Trump wants to gain direct control, large and pliant Republican majorities in both houses of Congress would be required to pass new laws and remove existing checks and balances," Schamotta said. "In the unlikely event those hurdles are passed, the impact would be profound for the US dollar and the US economy's place in the world."

Diluting the Fed's dual mandate and giving it less autonomy would impair the ability of policymakers to tighten monetary policy if prices rise suddenly and could leave rate consistently below neutral levels, which would boost inflation over the long run, Schamotta said.

The Fed's commitment to maintaining low and stable price growth would face growing doubts throughout the economy, likely slow growth and create an unpredictable policy picture. Upending the Fed's autonomy from the White House could heighten uncertainty over the direction of domestic monetary policy which could be left up to political whims and weaken the US dollar's status globally.

"Fed independence is one of the pillars of having the dollar remain the world's reserve currency," said Patrick Leary, managing director with Loop Capital Markets.

When Trump put public pressure on the Fed to cut rates in late 2018, it likely influenced their decision, Leary said. If a president can now directly influence those decisions, longer term bond yields would likely increase.

"Investors will want to be compensated to holding longer term treasuries if longer term inflation expectations are higher," Leary said.