Trump vows to reduce interest rates, despite lacking direct influence.

• This week, former President Donald Trump stated that he would reduce interest rates if he were elected.
• The Federal Reserve, which is an independent agency, sets interest rates and makes decisions about monetary policy, meaning it is theoretically immune to political influence.
• The FOMC's policy decisions will not be influenced by politics, as stated by Fed Chair Jerome Powell.

During the National Association of Black Journalists' annual convention in Chicago on Wednesday, former President Donald Trump stated that inflation and high interest rates are "wreaking havoc on our nation."

The Republican presidential candidate stated that he would lower interest rates significantly if he were elected.

"I lower inflation, allowing people to buy bacon and ham sandwiches, enabling them to dine out affordably," he stated.

The Federal Reserve, not the president, controls interest rates and operates independently of the White House.

Since the Covid-19 pandemic, inflation has been a persistent issue, with price increases reaching their highest levels in over 40 years. In response, the Federal Reserve, which sets interest rates, implemented a series of rate hikes to slow down the economy and control inflation.

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The Fed's preferred inflation gauge, the personal consumption expenditures price index, showed a 2.5% year-over-year increase in June. Recent economic data suggests that inflation is falling back towards the Fed's 2% target, which may lead the central bank to lower its benchmark rate for the first time in years.

The federal funds rate, which affects both overnight borrowing costs for banks and consumer borrowing costs, is currently within a range of 5.25% to 5.50%, resulting from 11 rate increases from March 2022 to July 2023.

As the interest rate decreases, consumers may experience a reduction in their borrowing costs.

'A highly consequential year'

In a press conference at the start of 2024, Fed Chair Jerome Powell stated that the year would be highly consequential for the Fed and monetary policy.

The anticipated rate cut, which is welcome news for Americans struggling to keep up with sky-high interest charges, has been laid by signs of economic growth and cooling inflation in the months that followed.

The Federal Open Market Committee met for two days this week, and Powell stated that central bankers may cut rates as early as September if the economic data supports it.

A contentious history

Trump, who appointed Powell as the head of the nation's central bank in 2018, later became a harsh critic of the Fed chief and his colleagues, disregarding historical precedent while in office by frequently and publicly attacking the Fed's decision-making.

Trump, while in the White House, frequently criticized the central bank for keeping the fed funds rate excessively high, which negatively impacted businesses and consumers' ability to borrow and put the U.S. at a competitive disadvantage compared to countries with lower rates.

Despite Trump's comments, the Fed's benchmark remained unchanged.

Despite any pressure from the White House, any chairman will remain committed to the Fed's mandate, according to Brett House, an economics professor at Columbia Business School.

This year, the former president stated to Fox Business that he would not renew Powell's term as Fed chairman. Trump explained, "I believe he's politically motivated. I think he'll do something to aid the Democrats if he reduces interest rates."

In an interview with Bloomberg Businessweek in July, Trump stated that cutting rates before the presidential election in November is something that central bank officials should avoid doing.

Powell emphasized the Fed's sole concentration on the economy when questioned about the comments on Wednesday. (The central bank's primary objectives with regard to the economy are to foster maximum employment, maintain price stability, and achieve moderate long-term interest rates.)

"Powell stated that our approach remains unchanged in addressing other factors, such as the political calendar, and we never employ our tools to support or oppose a political party, politician, or any political outcome."

The central bank is an autonomous body responsible for making decisions regarding monetary policy, free from any political interference or pressure.

Bankrate.com's chief financial analyst, Greg McBride, stated that the Fed will fiercely maintain their autonomy, regardless of who becomes the president.

The election effect on interest rate policy

The Fed has consistently maintained its course during presidential election cycles, whether it was tightening in 2004, cutting in 2008, or remaining on hold in 1996, 2012, and 2020, as stated in a research report by Wells Fargo released in February.

Since 1994, the Fed has adjusted its policy rate roughly the same number of times during presidential election years as during non-election years, according to the report.

According to a research note by Barclays, there is no evidence that Federal Reserve policy is different during presidential elections.

"McBride stated that the Fed's independence will remain crucial, and in the future, the broader economy will influence what the Fed does."

The Fed board members are nominated by the president and must be approved by the Senate. Powell will conclude his second four-year term as chair in 2026, opening the door to a potential change in leadership and direction of monetary policy during the next presidential term.

The Trump campaign did not respond to CNBC's request for comment.