Former President Donald J. Trump relentlessly criticized the Federal Reserve and its Chairman Jerome H. Powell during his time in office. As he competes with President Biden for a second term as president, many on Wall Street are wondering: What would a Trump victory mean for America’s central bank?
The Trump campaign doesn’t yet have detailed plans for the Fed, several people close to it said, but outside advisers have focused more on the central bank and made suggestions — some minor, some extreme.
While some in Trump’s circles have floated the idea of limiting the Fed’s ability to set interest rates independently of the White House, others have strongly rejected the idea, and people close to the campaign said they considered such a drastic measure possible was unlikely. Restricting the central bank’s ability to set interest rates without direct influence from the White House would be legally and politically difficult, and such overt manipulation by the Fed could roil the very stock markets that Mr. Trump has often used as a measure of his success.
But other aspects of Fed policy could be directly targeted by Mr. Trump, as both former administration officials and conservative political thinkers have suggested.
Mr. Trump is poised to once again use public criticism to put pressure on the Fed. If elected, he would also have a chance to appoint a new Fed chair in 2026, and he has already made clear in public comments that he plans to replace Mr. Powell, whom he appointed to the post before becoming president Biden reappointed him.
“There will be a lot of rhetoric against the Fed,” predicted Joseph A. LaVorgna, chief economist at SMBC Nikko Securities America, an informal adviser to the Trump campaign and chief economist at the National Economic Council during the Trump administration.
And some in Mr. Trump’s circles are urging the campaign to consider more substantial — even institutionally transformative — changes to the central bank. The Fed regulates the nation’s largest banks, and Mr. Trump could take steps that would give him more control over that process and ultimately make the rules less burdensome on financial institutions, for example.
Here’s how the Fed interacts with the White House today and how that could change.
The Fed is independent of the White House.
The Fed is responsible for keeping inflation under control, which it does by using higher interest rates to curb demand and take the pressure off prices. Sitting presidents essentially always favor low interest rates, which encourage people to borrow and help stimulate the economy, but they have no say in Fed policy.
Independence exists for one important reason: high interest rates can cause short-term economic problems and cost presidents re-election. However, sometimes they are necessary to ensure that inflation remains under control. Research suggests that allowing central bankers to set policy based on the country’s economic needs rather than a politician’s electoral needs allows policymakers to make better decisions.
Since the 1990s, White House administrations have largely avoided discussing Fed policy out of respect for independence. But Mr Trump turned that on its head during his time in office, regularly criticizing the Fed for keeping interest rates too high – suggesting that Mr Powell was an “enemy” and the chairman and his colleagues were “demons”.
This is likely to remain the case if Mr. Trump is elected. He has already suggested that any attempt to lower interest rates before the election would be a political ploy to help incumbent Democrats. He made similar statements in the run-up to the 2016 election and then called for lower interest rates after his term in office.
Direct efforts to control interest rates could be difficult.
As president, Mr. Trump learned that chastising the Fed did little to change policy — officials privately resented his comment but publicly ignored it and cut interest rates by less than what Mr. Trump wanted.
The big question is whether Mr. Trump might go further this time and try to directly control Fed policy.
The Trump campaign website talks about bringing independent agencies under the president’s control (and promises to “put unelected bureaucrats back in their place”) but is silent on whether this includes the Fed.
Legal experts said it could be difficult for the White House to take control of the Fed’s interest rate policy without passing legislation through Congress. That was a reality that Russell T. Vought, who led the Office of Management and Budget in the Trump White House, alluded to in an interview with The New York Times in July.
Firing Mr. Powell could also be difficult.
However, a White House can influence monetary policy without doing so directly, including through executive appointments.
The president has the ability to nominate governors to the Washington-based Fed board when they resign or their terms expire. These officials account for seven of the 12 votes on interest rate policy, and the Fed’s chairman, vice chairman and vice chairman for banking supervision are all White House nominees.
These positions are all filled for now, with only two governorships expiring before the end of 2028. And Mr. Powell’s term as chairman doesn’t end until 2026. But Mr. Trump has previously considered firing the Fed chairman, raising questions about whether he could do it again.
In early 2018, Mr. Trump was dissatisfied with Mr. Powell’s lack of loyalty and explored the possibility of firing the chairman before determining that doing so would be legally questionable. In 2020, he floated the idea of removing Mr. Powell as chairman and simply leaving him as one of the Fed’s seven governors, but he never actually tried it.
While some people close to the campaign believe firing Mr. Powell again could be on the table, others have warned it would be legally untested and subject to legal challenge. Plus, Mr. LaVorgna said, if inflation remains stubborn, Mr. Trump could blame the Fed chair.
“Aside from the legal issues, there is no incentive to replace the chair,” Mr. LaVorgna said.
Mr. Trump could still use nominations to influence the Fed.
But Mr. Trump has made clear he has no intention of reappointing Mr. Powell after his term ends.
Mr. Trump would not be able to nominate anyone to replace Mr. Powell: nominees for Fed governor and leadership positions must seek Senate approval. Mr. Trump tried (or considered) appointing Fed governors who had expressed loyalty to him during his first term, including Judy Shelton, Herman Cain and Stephen Moore. None of them made it onto the Fed, in part because some senators clung to the idea that the Fed should be independent.
The names of potential Fed chiefs floating around this time are mostly conventional candidates with economic backgrounds and government experience.
Kevin Warsh, Stanford professor and former Fed governor; Kevin Hassett, former chairman of the Council of Economic Advisers; and Christopher Waller, a current Fed governor, are all mentioned as potential candidates. But it’s still early, decisions are still a ways off, and several people pointed out that the Fed’s campaign isn’t paying much attention at this point.
Changes to banking regulation could be on the table.
There is one notable exception: the Fed’s banking regulation appears to be firmly in focus. Mr. Vought said in his Times interview last year that the Fed’s regulatory functions should be subject to “at least” White House review.
And Mr. Trump himself appears to reference plans to gut Fed regulation in a video on his campaign website.
In it, he promises to sign a law that “bans bureaucrats” from punishing companies for violating rules they set through informal guidance. It’s something the Fed does to banks as part of its daily surveillance process, and it’s a practice that Randal Quarles, Mr. Trump’s vice chairman for banking regulation, tried to stop.
More recently, Republicans have voiced criticism of the Fed’s regulatory climate stress scenarios, which are designed to ensure banks take into account risks such as sea level rise and weather-related insurance payments. Critics worry they could make things harder and more expensive for oil and gas companies get funding (something progressive activists have been pushing for).
Mr. Trump seemed to make this point in his video, although he did not mention the Fed by name.
“Never again will bureaucrats be allowed to bully and pressure banks to strangle and financially disempower politically disadvantaged industries,” Trump said in the clip.
And Republicans are increasingly raising the possibility that the Fed’s independence should not extend to banking regulation — or the person who runs it.
Christina Parajon Skinner, a central banking legal expert at the University of Pennsylvania, recently began arguing that the Fed’s vice chairman for supervision could legally be removed by a president because his role is structured differently than that of Fed chairman.
The term of Michael Barr, the Fed’s vice chairman for banking supervision, ends in 2026. If Ms. Skinner is right, it would be possible to replace him sooner.
She said that while she disagreed with “some speculation” that Mr. Trump wanted to curb the Fed’s monetary policy independence, she believed that “financial regulation is something the administration would be interested in pivoting” if Mr. Trump won .
Jonathan Swan contributed reporting.
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2024-05-23 09:02:49
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