The potential for President Trump to replace Federal Reserve Chairman Jerome Powell with Treasury Secretary Scott Bescent is creating buzz in both Washington and Wall Street. However, lawmakers from both parties have expressed skepticism about this idea, particularly given the growing friction between Trump and Powell over interest rate policies. Such a shift could not only disrupt the markets but might also lead to legal complications.
Let’s delve into the legal and practical implications of merging these two vital roles in government finance.
First of all, is that legally possible?
Legal analysts suggest there are no existing laws barring the Secretary of the Treasury from also serving as the head of the Federal Reserve. Sarah Binder, a senior fellow at the Brookings Institution, pointed out that, historically, Treasury Secretaries were part of the Fed’s board prior to 1935.
Yet, appointing someone to lead both the Fed and the Treasury might challenge the concept of central bank independence, which has gained traction in recent years. Specifically, this could threaten a quasi-official agreement established in 1951 that delineates responsibilities between these entities regarding public debt management and interest rate decisions.
For roughly 75 years, the Treasury has focused on managing bonds and debts, while the Fed has taken charge of interest rates and money supply, aiming to prevent the political temptation of using monetary policy to solve budgetary issues.
Many experts, like Binder, still advocate for preserving this separation. “We definitely don’t want fiscal authorities dictating interest rates,” she elaborated.
Does the market accept that?
This year, the bond market reacted negatively to Trump’s trade policies, which prompted the White House to amend its tariffs strategy. Kevin Hassett, head of the National Economic Council, indicated that the White House had to reconsider its approach when the bond market took a hit.
The stock market, while shaky, seemed to stabilize after delays in tariff implementations. Nevertheless, some analysts doubt the market would welcome a dual leadership at the Fed and Treasury, arguing it could compromise the independence of the central bank.
“They won’t react positively. Even if some try to embrace it,” observed Stephen Mallow, managing partner at Beacon Policy Advisors.
The real concern is inflation
Central bank independence embodies the idea that it’s the Fed’s role to tackle unemployment, initiate recessions, and combat inflation—even when these decisions are unpopular. Historically, inflation’s potential for causing political and social unrest has often made it a greater concern than unemployment.
The worry is that if Bescent takes on this dual role, he might yield to Trump’s calls to lower interest rates, which could lead the Fed to be more lenient regarding inflation—a dynamic reminiscent of tensions between former President Nixon and Fed Chairman Arthur Burns.
With inflation emerging as a significant issue for the 2024 election, especially in the aftermath of the pandemic, public sentiment around rising prices has intensified. “People are increasingly sensitive to prices now,” commented David Beckworth from the Mercatus Institute. “It’s a real point of contention.” Trump might be risking a backlash here.
Other challenges that give independence
The prospect of holding both roles reflects broader concerns about rising public debt, particularly after the $3.3 trillion debt increase tied to the Republican tax cuts and spending bill signed by Trump on July 4.
Recently, Trump has encouraged the Fed to lower interest rates, highlighting how it could make borrowing less expensive and ease the burden of public debt payments. “We’re losing hundreds of billions!” he remarked about the impact of debt service earlier last month.
Senator Ted Cruz (R-Texas) has also proposed eliminating interest payments on reserves held by commercial banks at the Fed. This could incentivize banks to invest in bonds for better returns, as opposed to being required to hold reserves.
Beckworth described this as “financial oppression,” where inflation outpaces interest rates, leading to a rise in debt burdens.
The Fed has recently initiated plans to modify leverage ratios for major banks, which may also promote bond purchases aimed at reducing long-term interest rates.
Warnings regarding “Financial Control”
Changes in monetary policy driven by debt concerns and Trump’s criticisms, including the possibility of Bescent’s dual role, have sparked discussions about “fiscal control” among economists from both sides of the aisle.
A recent op-ed in the Washington Post by economist Lael Brainard advocated for the Fed to take a stronger stance against presidential debt pressures. However, the proposal has met skepticism and is seen as yet another push against institutional independence, similar to actions taken by the Trump administration in other federal agencies.
“Fiscal control and financial autonomy are opposing ideas,” remarked financial researcher Nathan Tankus. “The Fed is designed to have autonomy in determining economic policy.” He further emphasized that such decisions should take the macroeconomic landscape into account.
