The Journal. - Trump Allies Draft Plans to Rein in the Fed

Episode Date: April 30, 2024

Donald Trump's allies have drafted plans to curb the Federal Reserve’s independence, should Trump win a second term. WSJ’s Andrew Restuccia unpacks the proposals, which include giving the president a say in interest-rate decisions. Further Reading: -Trump Allies Draw Up Plans to Blunt Fed’s Independence  -Why Inflation Is Biden’s Most Stubborn Political Problem  -Even If the Fed Cuts, the Days of Ultralow Rates Are Over  Further Listening: -Why the Fed Is Steering Away From Rate Cuts  -The Man Who Waged War on Inflation  -The President, the Fed, and the Cut  Learn more about your ad choices. Visit megaphone.fm/adchoices

As you know by now, having listened to this podcast before, the Federal Reserve plays a major role in the U.S. economy, in large part by dictating interest rates, which affect everything from mortgages to credit cards to student loans. And something that makes the Fed somewhat unique is that it's pretty independent from the rest of the government. We sort of don't get to know these individuals that run the Fed very well. They're sort of these characters that operate outside of a whole lot of influence by the White House and the rest of

Washington. That's our colleague Andrew Restuccia. And the idea is that you're setting interest rates based on your best judgment about what the economy needs and not the whims of a president on any given day and the sort of political need to lower or raise rates. But recently, some people close to former President Donald Trump have been thinking about shaking up that system if he wins in November. thinking about shaking up that system if he wins in November. So we found out that there's a small group of former Trump administration officials and other allies of the president who have been discussing over the last few weeks and months a series of proposals that would essentially undercut the independence of the Federal Reserve. They're drafting a pretty dramatic rethinking of the way that the Fed currently sets interest rates, which would involve the president of the United States having some sort of consulting role in how those interest rates are set. If this plan were to be put in place, how significant would that be?

It would be a pretty dramatic shift. Now, whether it will actually happen, whether it's even possible, those are really big open questions. But if you're just thinking about the proposal itself, this would be a really massive shift. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Tuesday, April 30th.

Coming up on the show, Trump allies dramatic plan to reshape the Fed. Attention all soccer fans. From Orlando to Los Angeles, We'll see you next time. and diverse cultures. You'll love it so much, you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com. Andrew and a team of reporters recently spoke with some of Trump's allies, who told them about a 10-page document they've been putting together.

The document lays out a vision for what should happen to the Federal Reserve if former President Donald Trump wins a second term. What can you tell us about who wrote it? Yeah, so these are people who agree with the view in Trump's orbit that the Fed shouldn't be independent, or at least its independence should be checked in some way. And it's a group of fewer than a dozen people, and they've been meeting over the last few months. And their charge has been to come up with some policy infrastructure to put in place this check on the independence. Their argument is that the president, in this case,

President Trump, was elected in an open, fair election by the public. And so it doesn't make sense that he doesn't have a role in shaping interest rates, which is this massively influential thing, not only determines the shape of our economy, but also the future of our politics. And so they just feel like it's fundamentally wrong that the Fed operates on its own without any input from the president. Do you have a sense of how Trump feels about this document? We haven't been able to determine the degree to which Trump himself has been informed of all of these discussions. But several members of the group have told people that they believe that they have Trump's blessing in doing this work. So at this point, this is just an idea that's being floated. And it's not clear if Donald Trump, if he wins the presidency, would put any of this

in place. Exactly. In a statement, two Trump senior advisors told the Wall Street Journal that nothing is official unless it comes directly from Trump or his campaign. So let's now dive into what the document says and what it proposes. Can you walk me through each of the main points? Sure. And so maybe we can start with the biggest thing, which is that it proposes giving President Trump a consulting role on rate setting. And so one of the things they've discussed is sort of an informal process whereby as the president is choosing his next Fed chair, there would be kind of a tacit agreement that that person, if they're confirmed,

would check in with the president regularly and get his thoughts on where interest rates should be headed. But just to be clear, though, the chair of the Federal Reserve doesn't set interest rates by themselves. There's a committee that they work with, and the committee collectively decides where rates should be set. That's exactly right. So the Fed chairman can't, on his own or her own,

make a decision about where rates should be. And so, you know, it's not as easy as just getting the Federal Reserve chair on your side. But the Fed chair does have a huge amount of influence. And so influencing the Fed chair could, in theory, play a role. And then there are some more what one advisor described as, quote, zany ideas, including the prospect that President Trump himself could serve on the board of governors of the Fed. This is a pretty far-fetched idea that's really been untested, but it does sort of indicate the degree to which this group wants the president to have direct influence on the board.

And why would a president care, though? Like, why would a president want low interest rates versus high interest rates? The former president, President Trump, has an affinity for low interest rates because he thinks it's overall a good thing for the country. Because, you know, being able to borrow money at lower interest rates, he feels like is like a simulating thing for the economy. And obviously, that may be true to some extent, but that stimulation also potentially could create higher inflation. But how would it benefit him politically? It's a good question. I mean, I think it stands to reason that, you know, the average voter would ideally like low rates, because, you know, it makes borrowing of all kinds cheaper, right? So if you want to get a house,

if you want to, you know, take out a mortgage, lower rates are ideal. Besides having an influence over interest rates, what else would the White House get to have more say in? So the White House would also get to have more say in the regulations that the Fed puts forward. So right now, the Fed gets to create their own regulatory rules on, you know, all sorts of wonky economic things. And the White House doesn't really get a say in it. Under this new proposal, the White House would get a say and they get to review these rules. So right now, when, you know, the average agency like the Transportation Department or the Department of Defense puts forward a regulation, it gets sent to the White House and all the sort

of White House economists look through it and they determine you know what the benefits and the costs are going to be and whether the benefits outweigh the costs and then they often will go through that document and send it back to the agency and say okay here's xyz changes that you should make and then it goes back to the White House and it gets final approval and then like regulation comes out and that process doesn't happen now for the Fed because the Fed's independent and so the White House doesn't weigh in. Under the proposal, the White House would get to weigh in. And there's another idea in the proposal.

It has to do with the current Fed chair, Jerome Powell. The document also posits that Trump could fire Powell before his term as Fed chair ends in 2026. That's after the break. Embrace the summer vibes with Summersbee Hard Cider. Bursting with lovely aromas of apple, this light-bodied, fruity cider offers a crisp, clean finish, perfect for sunny days and warm nights.

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Family vacay? Reserve your ride as soon as you book your flights. To all the planners, now you can reserve your Uber ride up to 90 days in advance. See Uber app for details. Donald Trump nominated Jerome Powell as Fed chair early in his presidency. And when he took the job, Trump expected Powell would keep interest rates low. But that's not what Powell did. So it was going back to 2018

as the Fed started raising rates to deal with what was then a kind of tight labor market in an effort to prevent inflation. They started raising rates, and Trump began this really unusual campaign of publicly criticizing Powell. I think the Fed is far too stringent, and they're making a mistake, and it's not right. And then over the next couple years, that criticism became more and more intense and

more sustained and more regular. I'm not happy with his actions. No, I don't think he's done a good job. To the point where he, at one point on Twitter, asked who was the bigger enemy of the United States, Jay Powell or Chinese President Xi Jinping. Obviously, like, quite a provocative statement that really underscored the president's frustration.

Trump considered firing Powell, but high-ranking officials in his cabinet convinced him that he didn't have the authority to do so. Now, this proposal by Trump's allies suggests he could get rid of Powell after all. He would just have to demote him. He would still be on the board in some capacity. He just wouldn't be Fed chair,

and then you would have to elevate another one of the Fed's board of governors to the role. So Trump would be limited in terms of, he couldn't just pick anybody that's not currently on the Fed to be Fed chair. But that allows, in theory, would allow Trump to get at least someone that he feels like is more on his side as Fed chair. Trump could also just wait for Powell's term to end in 2026 and replace him then. People close to the former president say he has had informal discussions with advisors

about possible candidates, and that he's asked associates whether they'd be interested in the job. Are these things that are outlined in this proposal, are there things that the White House can just do? Or do they need congressional approval somehow? Like, what are the rules that govern how the Fed operates? Yeah, so, I mean, they're arguing that they could do at least some of this without congressional approval. There was an opinion from the Justice Department during Trump's first term, arguing that independent agencies, their regulations could be subject to review by the White House, and that they could do that without Congress intervening, without Congress approving it. And then some of the informal consultation part

wouldn't necessarily require new legislation because it would be sort of a tacit agreement between the president and his new Fed chair pick. And so the idea really behind this is that some of these things, or a lot of them, could be done without approval from Congress. Right, because a lot of these things are just norms, right? I mean, there's no law against the Fed chairman having regular meetings with the president to consult on

interest rates. Exactly, like the Fed has sort of decided and Washington has sort of decided that this is how it is. And there are examples like going back several decades, of a sort of different approach. One of the most famous examples is Arthur Burns, who was chairman of the Fed in the 1970s, during the Nixon, Ford, and Carter administrations. Burns kept interest rates lower for longer than many experts thought he should, and inflation spiked, partly as a result. He was really criticized for deferring to his bosses, the presidents, during his time at the central bank. And members of the Fed look back on that period and say that wasn't good. And so they have put in place all these, you know, unwritten rules and strictures that aren't really mandated by the law, but are meant to preserve their own independence. And so in theory, a president could attempt

at least to unwind some of that. Is it possible that giving a president more say over interest rates might actually be a good thing for the economy though? I mean, like politicians might be a little bit more in tune with what the American people want than these technocrats who say things like, you know, we might need a recession in order to bring down inflation.

I mean, in theory, you know, if you had a president that was, you know, paying close attention to the economy and what it might need, you could, in theory, see lower rates and rate cuts come faster. And that, you know, I guess the idea that, you know, conventional wisdom isn't always right, that the sort of ivory tower view of how economics should work isn't always right. And that may have some short term benefits, but it also could pose huge risks. I think that a lot of economists would say that you're sort of playing with fire by, you know, trying to influence the process too much. So once you have a president, in theory, meddling in this process, that could have pretty big economic consequences.

And I think the risk of a runaway inflation-type situation is high. So how have people around Washington, other lawmakers, reacted to you breaking this news of this draft proposal? So there's been a lot of frustration among Republicans, including some lawmakers, who feel that this is not something that Trump should actually pursue. And I should also say that it really has shed light on what's a pretty big divide among Trump's own advisors on how to approach this issue. You have sort of more traditional economists and economic thinkers in Trump's world who view the Fed's independence as something that really shouldn't be messed with. And you have this other group of, you know, conservative, more grassroots types who didn't come up in the

traditional Washington economic space, who have advocated for a much more aggressive approach to the Fed and the Fed's independence. So what do you think Trump might do to the Fed if he's elected? I mean, it's, Trump is a very difficult person to make predictions about, as you can imagine. And so we try not to get ahead of ourselves. You know, on paper, these ideas seem really unprecedented and unusual. But I think sometimes we forget that Trump himself was unprecedented and unusual in a lot of ways. One thing that I try to think about as a reporter who covers Trump is not to so readily dismiss ideas that seem outside the box.

But what we do know is that Trump himself has raised concerns about the Fed's independence. And he has complained privately to aides about why the president doesn't get any input in the setting of interest rates. And so what we know is that the president definitely feels that way. And what is a little bit less clear is if he's willing to put in place such a kind of massive rethinking of how the Fed is viewed right now. That's all for today. Tuesday, April 30th. The Journal is a co-production of Spotify and The Wall Street Journal.

Additional reporting in this episode by Nick Timuros and Alex Leary. Thanks for listening. See you tomorrow.