Former President Donald J. Trump relentlessly criticized the Federal Reserve and Jerome H. Powell, its chairman, during his tenure. As he competes with President Biden for a second presidential term, that story has many on Wall Street wondering: What would a Trump victory mean for the US central bank?
The Trump campaign does not yet have detailed plans for the Federal Reserve, several people in his orbit said, but outside advisers have focused more on the central bank and have been making suggestions, some minor, some extreme.
While some in Trump circles have floated the idea of trying to limit the Federal Reserve's ability to set interest rates independently of the White House, others have strongly rejected that idea, and people close to the campaign said they thought that such a drastic effort was unlikely. Curbing the central bank's ability to set interest rates without direct influence from the White House would be legally and politically complicated, and manipulating the Federal Reserve so openly could roil the same stock markets that Trump has frequently used as a yardstick for success. of the.
But other aspects of Fed policy could end up squarely in Trump's crosshairs, both former administration officials and conservative political thinkers have indicated.
Trump is ready to once again use public criticism to try to pressure the Federal Reserve. If he is elected, he would also have the opportunity to name a new Federal Reserve chair in 2026, and he has already made clear in public comments that he plans to replace Powell, whom he promoted to the position before President Biden reappointed him. to name.
“There will be a lot of rhetorical devices thrown at the Federal Reserve,” 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 under Trump. administration.
And some in Trump circles are urging the campaign to consider more substantial (even institution-altering) changes at the central bank. The Federal Reserve regulates the country's largest banks, and Trump could take steps that would give him more control over that process and ultimately make the rules less onerous for financial institutions, for example.
Here's how the Federal Reserve interacts with the White House today and how that could change.
The Federal Reserve is independent of the White House.
The Federal Reserve is responsible for keeping inflation under control, which it does by using higher interest rates to slow demand and relieve pressure on prices. Sitting presidents basically always prefer low interest rates, which encourage people to borrow and help boost the economy, but they have no say in Federal Reserve policy.
Independence exists for an important reason: high interest rates can cause short-term economic problems and have cost presidents re-election. But sometimes they are necessary to ensure that inflation is kept under control. Research suggests that allowing central bankers to set policies based on the nation's economic needs rather than a politician's electoral needs allows policymakers to make better decisions.
Since the 1990s, White House administrations have mostly avoided talking about Federal Reserve policy out of respect for independence. But Trump changed that while he was in office, regularly criticizing the Federal Reserve for keeping interest rates too high, suggesting that Powell was a “hater” and that the president and his colleagues were “fools.”
That seems destined 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 Democrats in power. He made similar comments in the run-up to the 2016 election, and then went on to call for lower interest rates once he took office.
Direct efforts to control interest rates could prove difficult.
As president, Trump learned that punishing the Federal Reserve did little to change policy: Officials privately bristled at his comment, but publicly ignored it, lowering rates less than Trump wanted.
The big question is whether Trump could go further this time and try to directly control Federal Reserve policy.
Trump's campaign website talks about putting independent agencies under presidential control (promising to put “unelected bureaucrats back in their place”), but does not say whether that includes the Federal Reserve.
Legal experts said it could be difficult for the White House to fight the Federal Reserve's interest rate policy without passing legislation in Congress. That was a reality that Russell T. Vought, who headed the Office of Management and Budget in the Trump White House, alluded to during an interview with The New York Times in July.
Firing Powell could also be complicated.
However, a White House can influence monetary policy without doing so so directly, including through leadership appointments.
The president has the opportunity to nominate governors to the Washington-based Fed board when they leave or when their terms expire. Those officials represent seven of the 12 votes on interest rate policy, and the president, vice president and vice president of banking supervision at the Federal Reserve are all White House-appointed governors.
Those roles are all filled for now, with only two governorships expiring before the end of 2028. And Powell's term as chairman doesn't end until 2026. But Trump has previously contemplated firing the Fed chair, raising the question Whether I could do it again.
In early 2018, Trump was disgusted by Powell's lack of loyalty and examined the possibility of firing the president before determining it would be legally complicated. In 2020, he floated the idea of removing Powell as chairman and simply leaving him as one of the seven Fed governors, but he never actually tried it.
While some people close to the campaign think that firing Powell could be back on the table, others have warned that doing so would be legally untested and open to a court challenge. Plus, LaVorgna noted, Trump could shift the blame to the Federal Reserve chairman if inflation remains sticky.
“Other than the legal issues, there is no incentive to replace the president,” LaVorgna said.
Trump could still use the nominations to influence the Federal Reserve.
But Trump has made clear that he has no intention of reappointing Powell when his term ends.
Trump couldn't name just anyone to replace Powell: nominees for Fed governor and leadership positions must win Senate confirmation. Trump attempted (or contemplated) appointing Federal Reserve governors who had expressed loyalty to him during his first term, including Judy Shelton, Herman Cain and Stephen Moore. None made it to the Fed, in part because some senators championed the idea that the Fed should be independent.
The potential Fed chair names circulating this time are largely conventional picks with economic backgrounds and government experience.
Kevin Warsh, Stanford professor and former Federal Reserve governor; Kevin Hassett, former chairman of the Council of Economic Advisers; and Christopher Waller, current governor of the Federal Reserve, are mentioned as potential candidates. But it's early, decisions are still far away, and several people noted that the campaign isn't paying much attention to the Federal Reserve right now.
Changes to banking regulation could be on the table.
There is one notable exception: The Fed's banking regulation appears to be firmly in the spotlight. Vought, in his interview with The Times last year, said that “at a minimum,” the Federal Reserve's regulatory functions should be subject to White House review.
And Trump himself appears to refer to plans to weaken Federal Reserve regulation in a video on his campaign website.
In it, he promises to sign a law to “prohibit bureaucrats” from punishing companies for violating rules they have established through informal guidance. That's something the Federal Reserve does to banks through its daily oversight process, and it's a practice that Randal Quarles, Trump's vice president for banking supervision, sought to reject.
More recently, Republicans have taken issue with the Federal Reserve's supervisory climate stress scenarios, which it tests to make sure banks are taking into account risks such as sea level rise and insurance payouts related to the weather. Critics fear they could make it harder and more expensive for oil and gas companies to get funding (something progressive activists have pushed for).
Trump seemed to allude to that in his video, although he did not mention the Federal Reserve by name.
“Never again will bureaucrats be allowed to bully and pressure banks into strangling, financially displacing, politically disadvantaged industries,” Trump said in the video.
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, has recently begun arguing that the Federal Reserve's vice chairman for supervision could legally be removed by a president because his role is structured differently than that of the chairman of the Federal Reserve. Federal Reserve.
Michael Barr, vice chairman of banking supervision at the Federal Reserve, will see his term expire in 2026. If Skinner is right, it would be possible to replace him sooner.
He said that while he disagreed “with some of the speculation” that Trump would want to restrict the Federal Reserve's monetary independence, he did think that “financial regulation is something the administration would be interested in pivoting” if Trump won. .
jonathan swan contributed reports.
