Can the Fed stay independent? Trump-era adviser may put it to the test.

Washington Post

2 days ago

White House economic adviser Kevin Hassett drew laughter from a roomful of economists in late March when he launched into an attack on wind turbines, blaming them for killing birds, in a riff that echoed President Donald Trump.
The off-the-cuff moment, at an event hosted by the Brookings Institution, stood out not just for the reaction, but for what it signaled about Hassett.
Hassett built his career in Washington as a fairly mainstream free market economist, advising GOP presidential contenders Mitt Romney and John McCain, and pushing for a carbon tax on coal and gasoline to curb greenhouse gas emissions. Some audience members said they were surprised to hear Hassett mocking windmills, a mainstay of climate policy, according to two people who attended the event, who spoke on the condition of anonymity because it was off the record.
'I was surprised to hear him say that kind of thing in front of a group of economists, most of whom he's known for decades,' one of the people said.
Hassett, director of the National Economic Council, has emerged as a leading contender to succeed Jerome H. Powell as chair of the Federal Reserve, raising questions among Fed watchers about whether Powell's successor will be truly independent of the White House. Hassett has shifted his views to align more closely with Trump's on key issues at the forefront of Trump's economic agenda, including immigration and trade.
The Fed's credibility depends on its independence from political pressure and investors' belief that it will raise rates if necessary to keep inflation in check. But Trump has said he wants a Fed chief willing to cut interest rates sharply to ease the cost of financing rising deficits, and Hassett has a track record of adapting to Trump's desires.
Markets are watching closely. Neil Dutta of Renaissance Macro Research said Trump's insistence on a Fed chair more closely aligned with his beliefs could leave Wall Street anxious about anyone who gets the job.
'Trump is going about this in such a way that it tarnishes anybody going in the door,' Dutta said.
If investors come to believe the next Fed chair will act as an extension of Trump's political will, rather than as an independent steward of monetary policy, they will probably demand higher yields on U.S. government debt to compensate for the expectations of higher inflation. That could push up longer-term borrowing costs across the economy, even if the Fed bows to pressure from the White House to cut its short-term benchmark rate.
Hassett is one of four top contenders to replace Powell, whose term expires in May, part of a fluid selection process that is still under discussion; a pick could be named in coming weeks. The others include former Fed governor Kevin Warsh, Treasury Secretary Scott Bessent and Fed governor Christopher Waller.
White House spokesman Kush Desai said Trump has a deep bench of qualified individuals to nominate. 'Americans can look forward to the President nominating someone who will restore competence and confidence with the Federal Reserve,' he said in a statement.
A request for comment from Hassett, directly, was not returned.
Trump has often gravitated toward advisers who show loyalty, and Hassett ranks among his longest-serving economic aides, as former chairman of the Council of Economic Advisers from 2017 to 2019. An expert on the link between taxation and investment, he played a key role providing economic justification for Trump's massive tax and spending bill that became law this month.
But Hassett hasn't always held the views he now espouses. Back in 2013, during his time as an economist at the American Enterprise Institute, Hassett argued that doubling legal immigration would boost U.S. growth. He spoke in favor of expanded immigration again in 2019, as he left the first Trump White House. In 2006, he wrote that he opposed building a border fence between the United States and Mexico.
More recently, he has supported the Trump administration's tougher stance on immigration and tighter enforcement of borders. In addition to sealing off the U.S.-Mexico border, the White House's termination of multiple temporary humanitarian immigration programs threatens to strip more than a million immigrants of their status and work authorization, according to immigration experts.
'It's 100 percent important that we secure our borders,' Hassett said recently on 'Unmuted,' the podcast hosted by Sen. Marsha Blackburn (R-Tennessee). 'The illegals were coming into the country and taking low wage jobs and driving down the wages of people who were legally residents here. … This border security policy is really advantaging people who are citizens of this country.'
Since Trump's first term, Hassett also has backed the president's aggressive use of tariffs, even though his earlier writings warned about the risks of protectionism. One article blamed the Smoot-Hawley tariffs in 1930 for helping to deepen the Great Depression. Another criticized agricultural subsidies and trade barriers in developed nations for stifling the growth of the agricultural industry in poor nations. In another, he supported free trade agreements with Colombia, Panama and South Korea. A fourth article blamed the 2008 financial crisis on, among other things, protectionist rhetoric from Barack Obama.
Hassett also once warned against 'China bashing,' writing in 2010 that blaming Beijing for the United States' economic woes was a political distraction from needed domestic revisions.
Despite his past warnings about protectionism, Hassett has become a vocal defender of Trump's tariff strategy. On ABC's 'This Week' last weekend, he praised Trump's tough negotiating style. New import levies are generating enormous revenue, haven't hurt U.S. consumers and are paid for by foreign firms, he said.
White House spokesman Desai said that it's not surprising that the president's NEC director agrees with the president's economic policies, which he said Trump has successfully implemented 'to tame inflation, create hundreds of thousands of jobs, and secure trillions in historic investment commitments.'
More recently, Hassett's views have shifted on the Fed and Powell. Though he previously said a half-point rate cut that the Fed made in September 'made a great deal of sense' based on worries of a slowing labor market, he now says the Fed under Powell acted in a political fashion to help Democrats.
'Jay Powell is the person who cut rates right ahead of the election to help Kamala Harris,' he said last month on Fox Business. 'He is a person who has been basically doing whatever it is that Elizabeth Warren wants him to do.'
While Powell's term as Fed chairman ends next spring, he can remain as one of seven central bank governors until early 2028. Whomever Trump appoints as Fed chairman will not alone decide interest rates and is just one voice on a 19-person committee of Fed officials who participate in policy meetings. But the Fed chair does hold significant sway on the panel.
Lately, the White House has seized on the $2.5 billion renovation of the Fed's headquarters along the National Mall, with officials accusing Powell of either misleading Congress or failing to properly notify a local planning commission about design changes. Trump even floated the idea of firing Powell over the issue this week, though his legal authority to do so is questionable and it remains to be seen if he will follow through. Powell and the Fed have defended the project, which has been plagued by cost overruns, and say they didn't believe their modest design changes needed to be resubmitted to the planning commission, based on its guidelines.
For decades, investors assumed Fed chairs would set policy based on economic data, not political demands. But that assumption will no longer hold for whoever replaces Powell, said Andy Laperriere, head of U.S. policy at Piper Sandler. That loss of faith could have significant consequences for financial markets, he said.
'We will operate with a different assumption,' Laperriere said. 'There's going to be a presumption that, at least to a degree, this person will bow to political pressure.'