The Fed in Trump’s crosshairs if he is elected

When he was president, Donald Trump relentlessly criticized the Federal Reserve and Jerome Powell, its chairman. As he runs for office again, his track record raises a question on Wall Street: What would a second Trump term mean for the Fed?

Trump does not yet have a detailed program for the Fed, people around him say, but outside advisers have looked into the issue and made suggestions: some minor, others extreme.

Some allies of Mr. Trump have floated the idea of ​​restricting the Fed’s independence in setting interest rates, but others oppose it; according to sources close to the Trump team, such a radical project is unlikely. Giving the White House any influence over the interest rate would be legally and politically tricky, not to mention the very disruptive effect it would have on the stock markets (which Mr. Trump has often invoked to tout his presidency).

But other areas of the Fed are in Mr. Trump’s crosshairs, say former administration underlings and conservative economists.

Mr. Trump intends to put pressure on the Fed again by publicly criticizing it, said Joseph A. LaVorgna, chief economist at SMBC Nikko Securities America, an informal adviser to the Trump campaign who served as chief economist of the National Economic Council for the Trump administration.

If elected, Mr. Trump will have the opportunity to replace Mr. Powell as early as 2026, a possibility that has already been clearly mentioned. Remember that Mr. Powell was appointed to this position by Mr. Trump, then reappointed by Joe Biden.

Some of Mr. Trump’s collaborators are urging him to make profound changes that could transform the institution. Thus, the Fed regulates the country’s big banks and Mr. Trump could assume more control over this process in order to make the rules less onerous for financial institutions.

Here’s how Mr. Trump could act toward the Federal Reserve.

Independence of the Fed from the White House

The Fed is responsible for controlling inflation: it raises interest rates to slow demand and reduce pressure on prices. The White House tenants still prefer low interest rates (which encourage people to borrow, which supports the economy), but they have no authority over the Fed’s decisions.

This independence is crucial: raising rates implies short-term economic difficulties (which have cost several presidents their re-election). But it is the key tool for controlling inflation. Studies show that the independence of the central bank in its choices – based on the economic needs of the country and not on the electoral interests of the president – ​​produces the best results.

Since the 1990s, presidents have generally avoided commenting on Fed decisions out of respect for its independence.

But Mr. Trump regularly criticized the Fed for interest rates that he considered too high, calling its 12 members “wooden heads” and Mr. Powell, in particular, an “enemy.”

It seems that this film will be replayed if Mr. Trump is elected: in fact, he is already saying that any rate cut before the election would be a political ploy to help the Democrats stay in power. He said the same thing before the 2016 election, then called for lower interest rates once in power.

Dictating rates to the Fed would be difficult

During his term, Mr. Trump saw the ineffectiveness of his critics. They only annoyed Fed members, who ignored them in public and cut rates much less than the president demanded.

But here’s the big question: Would Mr. Trump go further this time and attempt to directly control the Fed?

His campaign website talks about placing independent agencies under presidential control (promising to “put unelected bureaucrats in their place”), but does not name the Fed.

According to public law experts, the White House would undoubtedly have difficulty dictating its rates to the Fed without going through Congress to legislate. Russell T. Vought, who headed the Office of Management and Budget in the Trump White House, acknowledged this reality in an interview with the New York Times in July.

Firing Jerome Powell would be tricky

The White House can, however, indirectly influence monetary policy through appointments when governors who are members of the Fed board resign or reach the end of their mandate. These officials represent seven of the twelve votes on the Fed’s interest rate policy. Additionally, the president, vice president, and vice president for banking supervision are all governors appointed by the White House.

None of those positions are vacant, with only two governor’s terms expiring by the end of 2028. Mr. Powell’s term runs until 2026, but Mr. Trump has already considered firing him. Will he take action if he is re-elected?

In early 2018, Mr. Trump complained about Mr. Powell’s “lack of loyalty” and considered firing him, before being informed that doing so would pose legal problems. In 2020, he floated the idea of ​​stripping Mr. Powell of the Fed presidency and keeping him on the board as simple governor, but he did not follow through.

Some current aides to Mr. Trump say firing Mr. Powell remains an option, but others warn that it has no precedent and would likely be challenged in court.

In addition, Mr. Powell will be very useful as a scapegoat if inflation remains high, notes Mr. LaVorgna: “I see no advantage in replacing the chairman of the Fed,” he said. Even if there was no legal problem. »

An exception: banking regulations

There appears to be one exception on the agenda: Fed banking regulation.

Last year, Mr. Vought said that, at a bare minimum, the Fed’s regulatory functions should be subject to review by the White House.

Republicans are increasingly challenging the independence of the Fed – and its chairman – in the area of ​​bank regulation.

Christina Parajon Skinner, an expert in banking law at the University of Pennsylvania, recently argued that the Fed’s vice president responsible for bank supervision can be removed from his position by simple decree of the president, because his role is not not structured like that of the Chairman of the Fed.

However, the one who currently occupies this position, Michael Barr, will see his mandate expire in 2026. If Mr^me Skinner is right, Mr. Trump could replace him sooner.

She denies “certain speculation” that Mr. Trump intends to reduce the monetary independence of the Fed, but she believes that “financial regulation is an element that the administration would like to pivot” if Mr. Trump does so. took away.

This article was published in the New York Times.

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