Trump’s potential plan for the Fed raises alarm bells

Former President Trump’s potential plan to exert more influence over the Federal Reserve is alarming pundits and investors.

The Wall Street Journal reported Thursday that a group of Trump allies is plotting ways to cut central bank independence a constant thorn in the former president’s side should he be re-elected in November. They also argue that Trump would have the power to remove Fed Chairman Jerome Powell, whom he appointed to the post in 2017 and then removed for most of his tenure, despite legal protections against being fired without cause .

The campaign has distanced itself from the plan and would face serious obstacles in Congress, where Trump’s previous efforts to sway the Fed in his favor fell flat.

During his first term, Senate Republicans rejected three of Trump’s Fed nominees over concerns about their credentials and independence, and several senators told The Wall Street Journal they would oppose the potential campaign plan for a second term.

Still, experts say Trump’s attempts could seriously damage the US and its role as the center of the financial world.

If it becomes clear that there will be a Fed chair who answers to the president, I would expect a dramatic reaction in the markets and the White House would have to deal with it, said Ian Katz, principal at research consultancy Capital Alpha Partners. .

There are a lot of people in the markets who would like Trump to be president again. I don’t think there are many people in the markets who would like to see Trump as the de facto chairman of the Fed.

The Trump campaign declined to provide The Hill with a copy of the plan obtained by the Journal and said it should not be considered an official position.

“Let’s be very specific here: Unless a message comes directly from President Trump or an authorized member of his campaign team, no aspect of the presidential staff or future policy announcements should be considered official,” the campaign said. from Trump in a statement.

The Fed is a politically independent agency led by a board of governors appointed by the president and confirmed by the Senate. The president also selects governors to serve as president, vice president, and oversight vice president, roles that also require Senate confirmation.

The president, however, has no legal power over the decisions of the Federal Open Market Committee (FOMC), the panel of Fed board members and regional bank heads responsible for setting interest rates. Fed chiefs have been particularly averse to presidential influence since the Nixon administration, when then-Fed Chairman Arthur Burns held off on raising interest rates under pressure from the White House despite rampant inflation.

Under the American system, you have some confidence that the president of the country can’t just pick up the phone, jaw on the Fed chair to cut interest rates when maybe that’s not the right economic decision to make in this moment, Katz. said

If you think the Fed has been manipulated for political reasons, that doesn’t make us any better in that regard than many, many countries in this world that we consider to have no reliable or stable financial markets.

But Trump’s campaign plan, obtained by the Wall Street Journal, would dismantle decades of institutional protections built to insulate the Fed from the president’s political whims.

The plan calls for installing a Fed chair that consults with Trump on interest rate decisions, according to the Journal, which would be a significant violation of banks’ operational autonomy.

The plan also calls for giving the White House more authority over Fed regulations and the Treasury Department a bigger role in joint emergency lending programs, such as those deployed during the 2007-08 and 2020 recessions.

Although Fed presidents and chairmen will meet periodically throughout their terms, the bank and the White House always insist that discussions never touch on interest rate decisions. Fed chairmen and Treasury secretaries meet more regularly, but also with limits around interest rate decisions.

Brian Gardner, chief Washington policy strategist at Stifel Investment Bank, said the proposal that the Fed chairman consult with Trump is unusual, but not as alarming as other possible plans in the Journal article.

Fed chairmen already consult with the Treasury secretary, so there is a well-established communications link between an administration and the Fed, Gardner wrote. He added that a president cannot force a deal and has limited (if any) recourse against opposition emanating from the commission.

Some Trump allies have also floated the former president as an acting Fed governor, according to the Journal, which Gardner said would certainly be litigated and would likely be rejected by the courts.

However, any effort, even if ultimately unsuccessful, could undermine investor confidence and disrupt financial markets at least temporarily, Gardner said.

Powell, a Republican, was renominated by President Biden and can serve as Fed chairman until the end of his term in 2026. Any attempt by Trump to fire Powell or reshape the Fed’s board beyond the nomination process would likely it would end up in court and cause severe losses in financial markets, one of Trump’s favorite ways to gauge his economic success along the way.

In a 2019 interview, Powell said he did not believe the president had the power to fire him and would serve out the remainder of his term. He also stressed the importance of the Fed’s autonomy and political independence, which makes it unlikely that it will yield to Trump.

The law is clear that I have a four-year term and I intend to serve it, Powell said.

We are directed to take, to execute policy, in a strictly non-political way, in the service of all Americans, and that is what we do, Powell said.

Powell has faced relentless pressure from Trump to cut interest rates throughout 2018 as the stock market tumbled and the former president sought more leverage in trade battles with the European Union and China. The Fed was in the process of raising interest rates from the near-zero levels set during the 2008 recession and was trying to get ahead of inflation that never materialized.

When the Fed reversed course in 2019 and began cutting rates, Trump still regularly criticized the Fed for refusing to cut from crisis levels. The former president questioned whether the Fed chairman or Chinese President Xi Jinping was more damaging to the US.

Trump eventually relieved Powell during the COVID-19 recession as the Fed cut rates and deployed trillions of dollars in stimulus to stave off a deeper crisis.

However, the former president has insisted he would not renominate Powell, raising questions about his motivations as the Fed prepares to cut interest rates after returning them to four-decade highs.

I think he’s going to do something to help the Democrats, I think, if he lowers interest rates, Trump said in an interview on Fox News Business Networks Mornings with Maria in February.

Trump added that he thought Powell was a politician.