While Trump didn’t specify what oil price level he thinks would justify an immediate interest-rate decrease, energy costs are known to impact inflation.
President Donald Trump said Thursday that once oil prices drop, he will demand that the U.S. Federal Reserve lowers interest rates immediately, setting the stage for possible friction with policymakers at the U.S. central bank, who maintain their monetary-policy decisions should be based on inflation data not political pressure.
Trump made the remarks during a virtual
speech on Jan. 23, during the World Economic Forum (WEF) in Davos, Switzerland, an annual meeting of global executives, bankers, and policymakers.
While discussing his economic policies, Trump touted
moves to unlock domestic U.S. energy production by fast-tracking approvals for new energy infrastructure. More oil and gas production would lower energy costs—and, therefore, also inflation—Trump said. The president added that he would push Saudi Arabia and the Organization of the Oil Producing Countries (OPEC) to boost their production as well and put further downward pressure on oil prices.
“With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world,” Trump said. “Interest rates should follow us,” he added, suggesting he expects the impact of falling oil prices to drive inflation down across the world, which would give central banks in other countries justification to lower their interest rates.
While Trump did not specify what oil price level he thinks would justify an immediate interest-rate decrease, energy costs are known to have a significant impact on inflation.
Historically, a 10 percent increase in oil prices has been estimated to raise inflation by 0.4 percentage points, primarily through direct effects on energy costs and indirect effects on transportation and production expenses, according to studies by the Federal Reserve and the International Monetary Fund (IMF).
The pace of inflation, as measured by the Consumer Price Index (CPI),
rose in December 2024 for the third month in a row, hitting 2.9 percent in annual terms. Since Trump assumed office on Jan. 20 and
signed an executive order declaring a “national energy emergency” and took a series of corresponding actions to advance his domestic energy production agenda, crude oil prices have dropped by around 2.5 percent. At the time of reporting, U.S. crude was
trading at around the $74 mark.
Although Trump said he would “demand” that the Fed lowers interest rates, a president is not formally empowered to order the central bank—which by law operates independently from government—to set monetary policy. The central bank’s insulation from political interference is widely seen by markets as a bulwark against financial instability.
When central banks operate without political pressure, they build credibility with the public and financial markets, according to a number of experts, including Kristalina Georgieva, managing director of the IMF.
Georgieva wrote in a March 2024
note that this credibility is essential for effective monetary policy, as it influences expectations and behaviors in the economy. She cited a study looking at dozens of central banks around the world showing that those with strong independence were more successful in keeping people’s inflation expectations in check, helping keep inflation low. Another study tracking over a dozen central banks in Central and South America found that greater independence was associated with “much better inflation outcomes,” she wrote.
The idea underpinning central bank independence from political pressure is that when politicians are in power, they are tempted to pressure central banks to lower interest rates because that makes it cheaper to borrow money and stimulates the economy, benefiting politicians in terms of public perception of their effective governance. However, when governments succumb to that temptation, this can lead to negative outcomes,
according to Agustin Carstens, general manager of the Bank for International Settlements (BIS), an international financial institution that is owned by member central banks and is sometimes referred to as a “bank for central banks.”
“Abuse of issuance erodes trust in money and the issuer, leading to inflation, depreciation of the national currency and financial instability,” Carstens wrote in a slide deck for a
speech he gave in Madrid, Spain, several days ago on the importance of central bank independence. Carstens’s presentation noted that “at the extreme,” abuse of central bank authority to print money can lead to hyperinflation, financial instability, recession, and mass unemployment.
However, critics often highlight concerns that central banks are run by unelected bureaucrats, raising questions about democratic accountability. Some commentators and policymakers, including Trump, have expressed a desire for greater executive branch influence over monetary policy. For instance, Trump
remarked during an event at the Economic Club of Chicago in October 2024 that U.S. presidents should be able to weigh in on interest-rate decisions—though he has never suggested that presidential input should be decisive.
“I think I have the right to put in comments as to whether the interest rates should go up or down,” Trump said at the time.
Federal Reserve chair Jerome Powell was asked about Trump’s remarks that he should have a say in the Fed’s interest decisions during a December 2024 appearance at the New York Times’s DealBook summit. Powell expressed confidence that there’s broad support on Capitol Hill for maintaining central bank independence.
“I’m not concerned that there’s some risk that that we would lose our statutory independence,” he said. “There’s very, very broad support for that set of ideas in Congress, in both political parties, on both side of the Hill.”
