The Fed under political pressure

It’s another Fed day, and the US central bank is widely expected to cut interest rates today. This rate cut is in reaction to the softening economic data, not the political pressure on Jerome Powell and his fellow FOMC members to cut rates. But markets are increasingly pricing accelerated rate cuts in 2026 once a new Fed Chair takes office. And Donald Trump keeps increasing the pressure on the Fed to cut rates anyway. This kind of political pressure is extremely dangerous, as a very thoughtful and comprehensive study by Thomas Drechsel demonstrates.

The study used President Nixon’s pressure on Arthur Burns in the second half of 1971 to identify how Presidents put pressure on the Fed to cut interest rates for political gain. He then traced the increased pressure on the Fed into the media coverage and changes in inflation expectations by professional forecasters and, of course, changes to monetary policy by the Fed. And as you may have guessed, it makes for grim reading.

In the second half of 1971, Richard Nixon met with Fed Chair Arthur Burns a total of 34 times to influence him to cut interest rates and boost Nixon’s chances of re-election. Today, Donald Trump does the same, but he doesn’t have to meet with Jerome Powell behind closed doors. He can post on his social media platform.

Using the number of interactions between the President and the Fed chair as a measure for political pressure, the charts below show the reaction of short-term interest rates (T-Bill rate), inflation (GDP deflator), and growth (real GDP) to a pressure campaign of 10 interactions of the President with the Fed chair. All reactions are controlled for changes in other economic variables like inflation, growth, deficits, and government spending.

Economic impact of increased political pressure by the President on the Fed

Source: Drechsel (2025). Note: Lines indicate median response, dark areas 68% confidence interval, light areas 90% confidence interval.

There are three clear results visible in the empirical results:

Political pressure was successful in the past, pushing short-term interest rates down in the 12 months after the pressure was applied.

The problem with the lower rates is that they create inflation. Inflation accelerates in year two after the pressure is applied, and after a decade, prices are about 4% to 5% higher. Applying about half the political pressure as Nixon did in 1971 increases prices by 7% in the long run. And in my view, Trump’s pressure on the Fed right now is not half the pressure Nixon applied, more like twice the pressure.

Interestingly, there is no boost to real GDP from the political pressure on the Fed and lower interest rates. While some sectors of the economy gain (e.g. through lower mortgage rates), other sectors lose because of rising inflation and rising costs. Indeed, political pressure on the Fed creates a stagflationary impulse.

The lack of economic growth from lower interest rates in this case is quite surprising, but the paper shows that investors react very differently to interest rate cuts the Fed makes due to economic necessities vs. political pressure.

The charts below show that in response to political pressure campaigns, investors significantly increase their inflation expectations and the uncertainty about future inflation increases as well. It is these expected higher costs and higher uncertainty that reduce economic activity because businesses curtail investments and households accumulate precautionary savings.

In short, a Federal Reserve that loses its independence comes with all the downside of higher inflation but very little of the upside.

Change in inflation expectations (left) and inflation uncertainty (right) after a political pressure shock (blue) vs. a monetary policy shock (red)

Source: Drechsel (2025). Note: Lines indicate median response, dark areas 68% confidence interval, light areas 90% confidence interval.