A bold move by President Trump to reshape the Federal Reserve has backfired, potentially leading to an unexpected outcome. Jerome Powell, the current Fed Chair, might just stay in his position, while Stephen Miran, Trump's staunchest supporter on the rate-setting committee, steps down from his White House role.
Trump's long-standing feud with the Fed Chair is no secret. He has repeatedly attacked Powell, often personally, since his presidential campaign. Initially, Trump wanted higher interest rates to prevent a boost to Biden's economic ratings. But once in office, he switched tactics, lobbying for lower rates and even going so far as to make legal threats to influence monetary policy.
Last week, Trump seemed to achieve a key goal: finding a replacement for Powell, whose term ends in May, who aligns with his dovish preferences without appearing too close to the White House, which could spook markets. Enter Kevin Warsh, a former Fed governor under Ben Bernanke. Warsh's hawkish tone on the central bank's balance sheet didn't cause major market disruptions, but it may not quickly shape the FOMC's base-rate discussions as Trump had hoped.
The catch? Warsh needs Senate Banking Committee approval, and Democrats on the panel are refusing to proceed until the Trump administration drops criminal proceedings against Fed members. In a statement, banking committee Democrats demanded that "any nomination proceedings for Mr. Warsh be delayed until after the pretextual criminal investigations involving Chair Powell and Governor [Lisa] Cook have been closed." Currently, Powell and Fed Governor Cook are facing court action. The U.S. Supreme Court has already barred Trump's attempt to remove Cook from her post, based on allegations that she fraudulently secured favorable mortgage terms before joining the Fed, which she denies.
Powell himself confirmed earlier this month that he is under criminal investigation by the Department of Justice for testimony he gave to a Senate committee about Federal Reserve building renovations. The renovation costs have been a point of contention between Trump and Powell, with the two arguing in July, in front of the world media, over whether the budget had been exceeded.
The Democrats' statement added, "The [Warsh] nomination comes after months of repeated efforts by President Trump and his administration to influence the Fed by intimidation, including by opening criminal investigations into Fed Governor Cook and Fed Chair Powell. These ongoing efforts by the president to control the Fed—which must be able to exercise independent judgment—undermine public confidence in any nomination for chair at this time."
With Trump showing no signs of dropping the investigation, UBS chief economist Paul Donovan suggests that the Democrat roadblock could keep Powell in his position as Fed Chair even longer. In a client communication, Donovan noted that the Democrats' action "was expected, but raises the prospect of Chair Powell staying on as FOMC chair (not Board of Governors chair) beyond May."
Meanwhile, Trump's main ally at the Fed, Stephen Miran, has resigned from his White House post as chairman of the Council of Economic Advisers (CEA). Miran had been temporarily filling a governor position at the Fed, replacing Adriana Kugler, whose term ended in January. Miran had pledged to resign from the CEA if his Fed duties continued beyond that date, which he has now done.
While it's unclear if Miran will receive a formal nomination to continue at the Fed, his resignation marks a public reduction in the proximity between the White House and the Fed, which is legally mandated to be politically independent. White House spokesman Kush Desai praised Miran's contributions, stating, "Prior to Stephen's leave last September, his brilliant insights and powerful advocacy on behalf of the president made him an enormous asset for the White House, and he established himself as a key member of the Trump administration's economic team."
This story is a reminder of the delicate balance between political influence and the independence of central banks. With the Democrats' roadblock and Miran's resignation, the future of the Fed Chair position remains uncertain. What do you think? Should central banks be completely independent, or is some political influence necessary? We'd love to hear your thoughts in the comments.
