Fed Independence at Stake During Milan’s Confirmation Hearing

The nomination of Stephen Milan for a Federal Reserve Commission seat sparked important discussions about the independence of the Fed during a confirmation hearing on Thursday.

Senators from both parties on the Banking Committee were keen to understand whether Milan could make decisions separate from the preferences of President Trump.

Trump has been vocal about wanting him to reduce interest rates once he assumes control of the central bank. Previously, he has pressured Jerome Powell, the current Fed chair, and dismissed federal governor Lisa Cook, actively seeking a majority on the interest-setting committee aligned with his wishes.

Historically, central banks have faced political pressure, but Trump’s vocal critique of the Fed’s independence raises concerns about inflation and the risk of monetary policy becoming politically motivated.

Democrats Criticize Milan as Trump’s “Cheerleader”

Democratic senators quickly framed Milan as a Trump loyalist.

For example, Senator Elizabeth Warren (D-Mass.) pressed him on whether he believes Trump lost the 2020 election, the accuracy of the Labor Department’s employment data, and the role of tariffs in rising prices.

Milan dodged these questions, stating that Congress recognized Biden as the election winner, mentioning issues with the Labor Bureau’s survey response rates, and claiming tariffs aren’t responsible for inflation, despite widespread economic consensus to the contrary.

“Every decision he makes will be viewed with skepticism that he isn’t an honest broker, but rather a Trump puppet,” Warren remarked.

Republicans, too, sought assurance from Milan about his commitment to acting independently as a Fed governor.

“If confirmed, I will act independently as the Federal Reserve always does,” Milan assured Banking Committee Chairman Tim Scott (R-S.C.).

They highlighted what they viewed as politicization under the Biden administration, including initiatives on climate risks in economic models and diversity efforts.

Milan’s Dual Role Raises Questions

Milan mentioned that, if confirmed, he would take an unpaid leave from his current position rather than resign from his role as White House Economic Adviser.

Trump appointed him to fill the term of former Fed governor Adriana Kugler, who is nearing the end of her five-month term. Milan argued that his brief stint at the Fed doesn’t necessitate a formal resignation.

This situation allows him to hold a position at the seemingly independent Fed while still being connected to the White House.

Some Democratic senators accused this arrangement of undermining Milan’s stated standards for Fed appointments.

Last year, Milan authored a paper advocating for a “revolving door” ban between federal service and the executive branch for four years after leaving office. “To better insulate board members from daily politics, they should be banned from serving in the executive branch for four years post-term,” he wrote for the Manhattan Institute.

During the hearing, Milan distanced himself from his prior stance, suggesting such measures could be implemented incrementally.

“I think these considerations need context within the broader reform framework,” he noted.

Democrats expressed dissatisfaction with his responses.

“I don’t see how your nomination doesn’t contradict the very principles you set for yourself,” questioned Senator Tina Smith (D-Minn.).

Changing Role of the Fed under Trump?

Many of the ideas Milan proposed in his recent paper mirrored practices adopted by the Trump administration, which altered longstanding economic norms.

Policies such as broad tariffs, currency devaluation, and pressures on allies to boost defense spending reflect recommendations he has made, some of which were previously deemed unlikely by experts.

Milan has also suggested significant changes to the Fed, such as nationalizing reserve banks and altering the voting structure of the open market committee. These ideas indicate a shift in the future direction of the Fed.

Mark Spindel, founder of Potomac River Capital, pointed out that Article 2 of the Federal Reserve Act grants considerable authority for reorganization that might not require council approval.

Claudia Sahm, a former Fed economist, raised concerns about Milan using his role to enforce stricter control over the Fed’s monetary policies. “He can believe the Fed should be independent, but it’s inappropriate for him to use his position to enforce that,” she argued. “There’s a vital distinction between who should control monetary policy and who influences it.”

Milan reiterated his commitment to prioritize the Fed’s core responsibilities while remaining an independent voice. “The president nominated me for a policy view he supports,” he said. “If confirmed, I will act independently, as the Fed always does. It’s beneficial to hear from all perspectives.”

Will the Market Tolerate a Less Independent Fed?

Regardless of governance structures, investors and economists are apprehensive about the potential blurring of financial and fiscal policies, especially if the Fed comes under more executive control. This could trigger unrest in the bond market, leading to increased long-term yields.

“We’ve noticed a rise in traditional algorithms measuring term premiums,” Spindel noted.

“The challenge lies in managing the balance sheet… Even if the Fed distances itself from the president, it could face pressures leading back to the administration,” he cautioned.

Despite the risks, the administration might be seeking to integrate financial and fiscal policies as tariffs aim to cover rising national expenses.

“It appears the president is testing limits,” remarked Graham Steele, a senior Treasury official during the Biden administration. “There’s a risk involved when individuals are too closely aligned with the White House. That seems to be part of the strategy.”