By Tolga Sahin | Intern
The push for cheaper money now has a name. President Donald Trump is betting on a new face at the Federal Reserve to deliver the faster interest rate cuts he has long demanded, marking a defining economic policy move of his second term.
Trump nominated Kevin Warsh to be the next chair of the Federal Reserve, who will succeed Jerome H. Powell when Powell’s term ends May 15. The nomination is in the Senate for confirmation.
The nomination comes amid a U.S. Department of Justice investigation involving Powell. In a Jan. 11 statement, Powell said the DOJ served the Federal Reserve with grand jury subpoenas and threatened a criminal indictment tied to his Senate Banking Committee testimony about a renovation project for federal buildings in Washington.
“I have deep respect for the rule of law and for accountability in our democracy,” Powell said in the statement. “No one, certainly not the chair of the Federal Reserve, is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.”
Dr. David Bridge, assistant professor of political science, said Powell’s statement reflects a deeper conflict. The DOJ investigation is not truly about Powell’s testimony or the building renovation, but rather about the Federal Reserve’s refusal to align its rate decisions with the president’s preferences.
“Those are pretexts,” Bridge said. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”
Bridge said the tension highlights a foundational principle of the Federal Reserve’s design, the separation of monetary policy from partisan politics. While Congress and the president shape fiscal policy, which naturally carries political influence, the Fed was built to operate independently on monetary decisions.
“Congress and the president make fiscal policy, and that has partisan politics embedded into it,” Bridge said. “That’s fine, that’s not bad. But the idea is that there should be a separate institution, the Fed, to make monetary policy absent of partisan politics.”
Bridge added that despite this design, political pressure on the Fed is not new. The institution has historically maintained its course regardless.
“In the past, the way it’s worked is the Federal Reserve does whatever it wants, regardless of what elected institutions prefer,” Bridge said. “If the Trump administration wants to put public pressure on the Federal Reserve, it has the right to do that. At the same time, the Fed has the right to abide by its charge and do what it thinks is best for the nation’s economy.”
The Federal Open Market Committee decides on the set the target range for the federal funds rate. It consists of 12 members, seven governors and five regional reserve bank presidents. The committee voted on Jan. 28 to hold the federal funds rate at 3.5% to 3.75% and said it will “carefully assess” incoming data before making any further adjustments. Two governors dissented in favor of cutting.
Assistant Professor of Finance Joshua Thornton said the Fed’s rate decisions come down to a balancing act between two competing goals, stimulating economic growth and keeping inflation in check. Cutting rates makes borrowing cheaper across the economy, which can boost growth, but moving too fast carries risks.
“When you cut interest rates, it basically makes money cheap,” Thornton said. “People all throughout the economy, whether it’s businesses or individuals, can get loans with less interest. This tends to have the effect of helping economic growth because people can take out more money for cheaper.”
Thornton said that danger lies in cutting too aggressively, which could reignite inflation. The Fed relies heavily on employment and price data to time its decisions, weighing whether the economy needs a boost against the risk of rising prices.
“If jobs are good but inflation’s still a little bit high, then you don’t want to cut rates because by cutting rates you might kick off some inflation,” Thornton said. “On the flip side, if the economy needs a little boost, maybe job data starts looking bad and there’s more unemployment. If you think inflation is somewhat under control, that’s when you might make a rate cut, to try to help with jobs.”
Bridge said the Senate confirmation process plays a key role in conferring democratic legitimacy on the Fed chair. Because the president appoints and elected senators confirm, the process ties an otherwise independent institution to the will of voters, but only at the point of entry. After that, the expectation is that the chair operates free from political interference.
“Because they’re confirming, and the president’s elected too, that gives democratic legitimacy to the Fed,” Bridge said. “But after confirmation, we want to let these people do their jobs. So it’s kind of a one-time thing that legitimizes members of the Federal Reserve in the eyes of the Constitution, but also allows them to do their job, absent of politics.”
Warsh’s nomination must first advance through the Senate Banking Committee, then reach a full Senate vote.
The debate over interest rates is not just a Washington conversation. It reaches students and everyday consumers. Thornton said Baylor students who rely on loans for tuition, cars or future mortgages would feel the effects of a rate cut directly through lower borrowing costs.
“When the Fed rate is cut, it means that banks can borrow money more cheaply,” Thornton said. “Because banks can borrow money more cheaply, they can lend money to consumers or students more cheaply.”
Thornton said those savings can show up across the board, from mortgage rates to car loans. However, he cautioned that the benefits of cheaper borrowing can be offset if rate cuts trigger a new wave of inflation that drives up everyday prices.
“Following a rate cut, you might see mortgage rates go down, you might see car interest rates go down, any sort of borrowing costs might go down,” Thornton said. “The flip side of that is if the interest rate cuts kick off inflation, then as a student or as a consumer, you feel the inflation when you go to purchase things. Groceries might be more expensive, and some other prices might go up.”
