Trump's campaign is studying steps to exclude Federal Reserve Chairman Jerome Powell if the former president returns to the White House.
In an interview with Barron's, Scott Bessent, Trump's economic adviser, suggested that Congress approve the incoming Fed chairman more than a year before Powell's term expires in May 2026. This would effectively install a "nanny" next to the current Fed chairman and could make Powell a lame duck for the remainder of his term.
According to a recent report in the Wall Street Journal, Bessent, the founder of the hedge fund Key Square Group, was included in the candidate list for Treasury Secretary in the second Trump administration. Bessent told Barron's, "You can make the earliest Fed nominations and create a 'Shadow Fed Chair.' Based on the concept of forward guidance, no one really cares what Powell has to say anymore."
Trump campaign gave positive reviews
Trump's relationship with his self-appointed Fed chair became increasingly acrimonious in the second half of his last term. Powell repeatedly ignored White House pressure to stimulate the economy by lowering interest rates to help the president's reelection. Twitter tirades against Powell became the norm.
Bessant said he has circulated the plan to sideline Powell among Trump's campaign advisers, and it has been well received. Still, it is not official policy, at least not yet.
“This was my idea,” the hedge fund manager added, “not the potential president’s idea.”
A “bad” idea
Trump has publicly expressed a desire to undermine the Fed’s prized independence, citing his supposed business acumen. This has led to comparisons with Nixon, whose Fed chairman is widely regarded as the worst in recent Fed history.
Ed Yardeni, a Wall Street veteran and president of Yardeni Research, told Barron's that it was a "terrible" idea. A "shadow Fed chair" would "create a lot of noise in the market" and keep investors guessing about whose words carry more weight on the Fed's policy-setting committee. "Everyone will be looking at the calendar to see when Powell leaves," he said.
The Fed’s independence from political influence in the White House and Congress is considered sacrosanct. It is a key prerequisite for responsible monetary policy, which has price stability at its core.
One only needs to look at countries like Turkey to understand what happens when the head of state uses the power of his office to keep monetary policy rates artificially low.
Erdogan fired one central bank governor after another whenever they failed to do as he was told.
The result is double-digit inflation and people fleeing the Turkish Lira into anything that is a better store of value, whether it's dollars, gold or cryptocurrencies$BTC
Fed’s credibility damaged
In the past, Trump's ideas to weaken the Fed's independence would have been met with strong opposition from all sides.
However, the Fed’s credibility was damaged after it incorrectly and repeatedly characterized the post-pandemic inflation surge as “transitory.” Fed officials then launched a series of harsh rate hikes in 2022 to correct their mistakes and put the inflation specter back in the bottle.
Still, Powell has won praise recently for gradually bringing inflation down from a peak of more than 9% two years ago.
Inflation has retreated back toward the Fed’s 2% target in recent months, even as the buoyant U.S. economy continues to expand at a modest pace amid a persistently strong job market.
