Administration Considers Broader Review of Federal Reserve Operations
U.S. Treasury Secretary Scott Bessent suggested on Monday that the Trump administration might focus on fundamentally changing how the “Federal Reserve” operates and analyzes the economy, rather than just replacing its chairman, Jerome Powell. Bessent, echoing President Trump’s ongoing critiques, told CNBC that the Fed’s “fear-mongering over tariffs” despite low inflation justified a comprehensive review of the central bank’s functions. He questioned the work of the Fed’s “PhDs,” implying a lack of clear results.
Deeper Impact Than Just Firing Powell
It remains unclear if Bessent’s comments are simply meant to pressure the Fed for faster interest rate cuts, as Trump has frequently demanded, or if a formal review of the Fed’s operations and analyses is genuinely planned. While recent speculation has centered on Trump trying to fire Powell, a review that alters the Fed’s core functioning could have a more lasting and significant impact than merely cutting short one chairman’s term. Although the Fed Chair is an important role, their power is limited to a single vote on the rate-setting “Federal Open Market Committee (FOMC)”, which includes seven Fed board members and five regional Fed presidents. The FOMC’s structure is partly designed to protect the central bank from undue political influence, and theoretically, the committee could even vote for a different FOMC Chair if they opposed a politically motivated appointee.
Challenges to Structural Changes and Shifting Influence
Any changes to the Fed’s institutional structure would require “Congressional approval”, a potentially lengthy process given that many Republicans might be hesitant to interfere with the Fed. A recent Supreme Court ruling also suggested preserving the Fed’s existing structures due to its “special historical status.”
However, influencing the “Fed’s thinking, forecasting methods, and operational procedures” is a different matter.
The Nuance of Powell’s Potential Removal
A Wall Street Journal report on Monday suggested Bessent had advised Trump against firing Powell, citing potential lawsuits from Powell or delays in Congressional approval for a replacement. These scenarios could lead to a leadership gap, with Vice Fed Chair Philip Jefferson, a Joe Biden appointee, temporarily taking over. Bessent reportedly argued that removing Powell now risked market disruption and economic uncertainty with no real gain, compared to simply waiting for Powell’s term to expire in May. Trump dismissed this report as “fake,” but Bessent acknowledged the final decision rests with the President.
The complexity of removing Powell might explain why the administration sees other avenues of pressuring the Fed to lower rates as more effective. With two Trump appointees already on the board (Christopher Waller and Michelle Bowman) advocating for immediate rate cuts, and two more board positions, including Powell’s, likely opening up by next year, a majority of the board could eventually consist of Trump appointees. However, SGH Macro Advisors’ Tim Duy notes that to truly reshape the Fed’s direction, the White House would need even more board seats to outvote the five regional Fed presidents on the FOMC.
Without such a strong majority, the Trump administration might instead focus on changing the “DNA” of Fed thinking”. A major review that alters the Fed’s standing assumptions, forecasting patterns, and public communication could have significant long-term consequences. For instance, former Fed policymaker Kevin Warsh, a potential pick for Fed Chair and a critic of traditional Fed analysis, believes there isn’t a trade-off between jobs and inflation as currently understood. He suggests rates could be lowered with tighter balance sheet policies. However, if markets perceive easing as inappropriate due to political interference, inflation expectations could rise, leading to higher long-term borrowing rates.
SGH Macro’s Duy suggests the administration’s goal might be to keep policy rates low while shifting U.S. Treasury issuance to shorter maturities, potentially aiming for a form of yield curve control. This is a delicate balancing act, and it won’t be easy to ensure the Fed’s full cooperation.
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