Trump’s potential plan for Fed raises alarms

Experts and investors are wary of former President Trump’s potential plans to exert more influence over the Fed.

The Wall Street Journal reported Thursday that a group of Trump allies is exploring ways to chip away at the central bank’s independence, a constant thorn in the former president’s side, in case he is re-elected in November. It was reported. Trump also claims he has the authority to fire Fed Chairman Jerome Powell, whom he appointed in 2017 and then abused throughout much of his term, despite legal protections against firing without cause.

The campaign has distanced itself from the plan, which will face serious obstacles in Congress after Trump’s previous efforts to sway the Fed in his favor have failed.

Senate Republicans rejected three Fed director nominees during Trump’s first term, citing concerns about their qualifications and independence, and several senators told the Wall Street Journal that Trump’s campaign He said he opposes any potential plans for a second term.

Still, experts say Mr. Trump’s efforts could seriously damage the United States and its role as a financial center.

Ian Katz, director of research consultancy Capital Alpha, said: “If it becomes clear that there will be a Fed chair who will answer to the president’s views, we can expect a dramatic reaction in the market, and the White House will need to address that.” There will be,” he said. partner.

“There are a lot of people in the market who want Mr. Trump to become president again. I don’t think there are many people in the market who want Mr. Trump to become the de facto Fed chairman.”

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

In a statement, the Trump campaign said: “Let me be very specific: Unless the message comes directly from President Trump or an authorized member of the campaign, future presidential appointments or policy announcements will be prohibited. No aspect of this should be considered official.”

The Federal Reserve is a politically independent agency operated by a board of governors appointed by the president and confirmed by the Senate. The president also selects governors to serve as chair, vice chair, and supervisory vice chair; these roles also require Senate confirmation.

But the president has no legal authority over the decisions of the Federal Open Market Committee (FOMC), the committee of Fed directors and top regional banks responsible for setting interest rates. Fed leaders have particularly disliked presidential influence since then-Fed Chairman Arthur Burns, under pressure from the White House, held off on raising interest rates despite rampant inflation during the Nixon administration.

Under the U.S. system, “there is a certain level of confidence that the president of this country can’t just pick up the phone and force the Fed chairman to cut rates…That’s probably the sound economic decision to make at that point.” Even though it’s not,” Katz said.

“If you think the Fed is manipulated for political reasons, we are no better off in that respect than many countries in the world that you think don’t have reliable, stable financial markets.”

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

The paper said the plan includes creating a Fed chairman who would consult with President Trump on interest rate decisions, which would be a serious violation of the bank’s operational autonomy.

The plan also calls for the White House to increase the Fed’s regulatory authority and give the Treasury a bigger role in joint emergency lending programs like those put in place during the 2007-08 and 2020 recessions. .

The Fed chair and governor meet regularly during their terms, but the Fed and the White House have always maintained that their discussions never touch on interest rate decisions. The Fed chair and Treasury secretary meet more regularly, but they also set boundaries when it comes to setting interest rates.

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

“The Fed chair has already consulted with the Treasury secretary, so there is a communication link established between the administration and the Fed,” Gardner said. He added: “The chairperson cannot force an agreement and has limited recourse (if any) to any objections from the committee.”

According to the magazine, some Trump supporters have floated the idea of ​​the former president serving as acting Fed governor himself, with Gardner saying he would “certainly be involved in litigation and that the effort would likely be rejected by the courts.” Probably.”

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

Powell, a Republican, was nominated by President Biden to serve as Fed chairman until his term expires in 2026. If President Trump were to try to fire Powell or reorganize the Fed’s board beyond the nomination process, it would likely end up being challenged in court, which could lead to serious consequences. Along the way, there will be losses in financial markets (one of President Trump’s favorite ways to measure economic success).

Powell said in a 2019 interview that he did not believe the president had the authority to remove him from office and that he would serve out the remainder of his term. He also stressed the importance of the Fed’s autonomy and political independence, saying it was unlikely to bow to Trump.

“The law is clear that my term of office is four years, and I intend to serve that term,” Powell said.

“We are directed to formulate and implement policy in a strictly nonpolitical manner to serve the American people, and that is what we will do,” Powell said.

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

When the Fed reversed course in 2019 and began lowering rates, President Trump still regularly criticized the Fed for refusing to cut rates to crisis levels. The former president questioned whether the Fed chairman or Chinese President Xi Jinping is more harmful to the United States.

Mr. Trump ultimately eased policy on Mr. Powell amid the coronavirus recession, as the Fed lowered interest rates and pumped out trillions of dollars of economic stimulus to avert a deep crisis.

But the former president still insists he has no intention of reelecting Powell, raising questions about Powell’s motives as the Fed prepares to cut interest rates by pushing them back to 40-year highs. .

“If we lower interest rates, we’ll probably do something to help the Democrats,” Trump said in an interview on Fox News Business Network’s “Morning with Maria” in February.

Trump added that he thinks Powell is “political.”