What Trump 2.0 Could Mean for the Federal Reserve

0
73
What Trump 2.0 Could Mean for the Federal Reserve

Former President Donald J. Trump was relentless in his criticism of the Federal Reserve and its Chairman Jerome H. Powell during his time in office. As he now competes with President Biden for a second term, many on Wall Street are wondering: What would a Trump victory mean for the US central bank?

The Trump campaign does not yet have detailed plans for the Fed, several people close to the team 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 firmly rejected the idea, and people close to the campaign said they thought such a drastic measure was unlikely. Limiting the central bank's ability to set interest rates without direct influence from the White House would be legally and politically difficult, and such blatant manipulation of the Fed could roil the very stock markets that Mr. Trump has frequently used as a yardstick of his success.

But other aspects of Fed policy could come directly into Mr Trump's sights, 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 Trump's entourage are urging the campaign to consider more substantial – and perhaps even institutionally transformative – changes to the Federal Reserve. The Fed regulates the nation's largest banks, and Trump could take steps that would give him more control over that process, ultimately making the rules less burdensome on financial institutions.

Here's how the Fed interacts with the White House today and how that could change.

The Fed is responsible for keeping inflation under control. It does this by curbing demand with higher interest rates and reducing price pressure. Sitting presidents generally prefer low interest rates, which encourage people to borrow and stimulate the economy, but they have no influence on 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 voter 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 tenure, regularly criticising 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 continue if 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 comments in the run-up to the 2016 election, and once in office he called for lower interest rates.

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 might be difficult for the White House to gain control of the Fed's interest rate policy without passing legislation through Congress, a reality that Russell T. Vought, who headed the Office of Management and Budget in the Trump White House, alluded to in an interview with The New York Times in July.

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 Fed's Washington-based board of directors when they leave office or their terms expire. These officials provide seven of the 12 votes on interest rate policy, and the Fed's chair, vice chair and vice chair for banking supervision are all White House nominees.

Those positions are all currently filled, with only two governorships expiring before the end of 2028. And Mr. Powell's term as chairman does not end until 2026. But Mr. Trump has previously considered firing the Fed chairman, raising questions about whether he might do so again.

In early 2018, Trump was unhappy with Powell's lack of loyalty and considered the possibility of firing the chair before concluding that it would be legally untenable. In 2020, he floated the idea of ​​removing Powell as chair 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 another firing of Mr. Powell could be on the table, others have warned that it would be legally untested and subject to legal challenge. Moreover, Mr. LaVorgna said, Mr. Trump could blame the Fed chair if inflation persists.

“Legal issues aside, there is no incentive to replace the chair,” LaVorgna said.

But Mr. Trump has made it clear that 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 circulating 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, current Fed governor, have all been mentioned as possible candidates. But it's early days, decisions are still a long way off, and several people have pointed out that the Fed's campaign isn't getting much attention right now.

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 with banks as part of its daily supervisory process, and it's a practice that Randal Quarles, Trump's vice chairman for banking regulation, tried to push back against.

Recently, Republicans have criticized the Fed's climate stress scenarios, which are designed to test whether banks consider risks such as rising sea levels and weather-related insurance benefits. Critics fear they could make it harder and more expensive for oil and gas companies to receive funding (something progressive activists have been pushing for).

Mr Trump seemed to allude to this in his video, but did not mention the Fed by name.

“Never again will bureaucrats be allowed to bully and pressure banks into strangling and financially disempowering 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 legal expert on central banking at the University of Pennsylvania, recently argued that the president could legally fire the Fed's vice chair, who is responsible for supervision, because his role is structured differently than that of the Fed chair.

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 would seek to curtail the Fed's monetary policy independence, she believed that “financial regulation is something the administration would be interested in pivoting on” if Mr. Trump won.

Jonathan Swan contributed reporting.