Trump's big fiscal dominance play

Politico

21-07-2025

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Quick Fix
President Donald Trump wants Federal Reserve Chair Jerome Powell to consider the cost of the government's ballooning debt service payments when the central bank meets later this month. It's an enduring theme in his ongoing effort to pressure the Fed chair to lower interest rates.
Powell 'is truly one of my worst appointments,' Trump posted on his social network, Truth Social, on Friday. 'We deserve to be at 1% [interest rates], saving One Trillion Dollars a year on Interest Costs.'
Here's why that matters: The Fed's primary responsibilities are to keep prices stable and promote maximum employment. When central banks prioritize government borrowing needs over their core mission — economists call this 'fiscal dominance' — it often leads to cascading inflation.
If bond investors and consumers assume that central banks lack the ability or political will to contain higher prices from stimulative federal spending, inflation expectations climb. The economic and political fallout can be massive; the subordination of monetary policymaking to accommodate fiscal expansion was a hallmark of recent out-of-control price surges in Argentina and Turkey, and it contributed to the collapse of the Weimar Republic in Germany.
So what? While he isn't using the phrase, Trump is making arguments in favor of a form of fiscal dominance. And while there are structural and technical safeguards in place to prevent such an outcome, they are not impenetrable.
The Treasury-Fed Accord of 1951 — struck amid rocketing inflation after a nine-year period when the central bank had agreed to keep rates low to help the government finance World War II and its aftermath — formalized the central bank's independence from Treasury with regard to setting borrowing costs. But as former Philadelphia Fed President Charles Plosser has noted, that accord is 'an institutional arrangement, not a legal agreement.'
And while the Federal Reserve Act is specific when it comes to the central bank's monetary policy objectives, fiscal considerations invariably factor into how central bankers consider the overall health of the economy. And deficits are expected to climb over the next decade as Trump's 'big, beautiful bill' takes effect.
'It would be very difficult to follow the direction in the Federal Reserve Act — to promote low inflation and full employment — if the Federal Reserve were pursuing a mandate of keeping debt service costs low,' said Lael Brainard, a former Fed vice chair and top economic adviser to President Joe Biden. Still: 'It's not an explicit prohibition, per se, but the dual-mandate responsibilities of the Federal Reserve are explicit.'
Another factor to consider: There's an argument emanating from Trump's orbit that the Fed and Treasury need to work hand-in-glove to manage the central bank's balance sheet — the Fed has been a major purchaser of government securities on the open market during periods of stress. That would invariably give the administration more say in decisions that affect interest rates.
Kevin Warsh, the former Fed governor who's now a contender to succeed Powell, recently floated the prospect of a new Treasury-Fed accord that would allow the Treasury secretary and central bank chief to 'describe to markets plainly and with deliberation, 'This is our objective for the size of the Fed's balance sheet.''
As Warsh described it, since the Fed's holdings of government securities have a bearing on both fiscal and monetary policy, such an accord wouldn't breach the central bank's independence.
Nevertheless, the prospect of a new Treasury-Fed accord would invariably raise questions about Trump's influence over policies that ultimately affect rates. And few expect markets to respond favorably if the president's pressure campaign ultimately undermines faith in the central bank's ability to stick to its mandate as deficits continue to climb.
As Brainard told me, 'At the end of the day, it's investors who decide how much they need to be compensated to hold longer-term Treasury securities and longer-term debt more generally. If their view is that inflation is going to be high — and that the Federal Reserve's ability to control inflation has been undermined — they'll simply demand more compensation.'
It's Monday — And it's another very busy week on the Hill. As always, send MM tips and pitches to me at [e-mail].
Driving the Week
Monday … The House Appropriations Financial Services and General Government Subcommittee holds a markup of the FY2026 Financial Services and General Government bill at 5:30 p.m. … The Senate Agriculture Committee holds a markup to vote on Brian Quintenz's nomination to be chairman and a commissioner of the Commodity Futures Trading Commission, along with other nominations …
Tuesday … Powell and Fed Vice Chair for Supervision Michelle Bowman speak at the Integrated Review of the Capital Framework for Large Banks Conference, which kicks off at 8:30 a.m. … World Bank President Ajay Banga speaks at the Center for Global Development's conference on development economies at 9:10 a.m. … Senate Finance Committee meets at 9:45 a.m. to mark up the nominations of Joseph Barloon to be a deputy U.S. Trade Representative in the Geneva Office and Brian Morrissey Jr. to be general counsel at Treasury … The Securities and Exchange Commission holds a meeting of the Small Business Capital Formation Advisory Committee at 10 a.m. … Senate Finance holds a hearing on the nominations of Jonathan McKernan to be Treasury undersecretary and Alex Adams to be assistant Health and Human Services secretary for family support …
Wednesday … House Financial Services has a second markup hearing scheduled for 10 a.m. … Senate Banking holds a markup to vote on the nominations of Ben DeMarzo to be assistant HUD secretary; Craig Trainor to be assistant HUD secretary; Jovan Jovanovic to be chairman of the Export-Import Bank; Francis Brooke to be assistant Treasury secretary; and David Peters to be assistant Commerce secretary at 10:30 a.m. …
Thursday … New home sales data for June is out at 10 a.m. …. House Financial Services ranking member Maxine Waters (D-Calif.) speaks at a Brookings Institution event at 11:30 a.m. …
Friday … The House Ways and Means Committee holds a field hearing on 'The One, Big, Beautiful Bill Delivering for American Economy' at 1 p.m. in Las Vegas
In his ear — The WSJ's Brian Schwartz and Nick Timiraos reported over the weekend that Treasury Secretary Scott Bessent has been making the case to Trump that he should not try to fire Powell, citing political and legal obstacles as well as the turmoil that action could unleash in markets.
— Trump, who's suing the Journal over its report on a birthday missive he allegedly wrote to disgraced financier Jeffrey Epstein, was not happy with the article. 'Nobody had to explain that to me,' he posted on Truth Social on Sunday. 'I know better than anybody what's good for the Market, and what's good for the U.S.A. If it weren't for me, the Market wouldn't be at Record Highs right now, it probably would have CRASHED! So, get your information CORRECT. People don't explain to me, I explain to them!'
First in MM: Warren hammers Pulte — Federal Housing Finance Agency Director Bill Pulte has been one of Trump's biggest attack dogs with regard to Powell and has been pushing for the Fed chair's ouster for weeks. The FHFA chief's unusual social media presence — he's repeatedly suggested that Powell will resign — led Massachusetts Sen. Elizabeth Warren on Sunday to send a letter demanding more information about his X usage, his focus on Powell and his work at the housing agency. [Link: https://cms.politico.com/cms/content/edit.jsp?typeId=0000014b-7431-dd1d-a1db-77bd78f20000&id=00000198-29f7-db71-ab99-7ffff1b80000 ]
'Your prolific activity on X and apparent decision to take time away from your duties as FHFA Director to draft a letter for President Trump to fire Chair Powell are abnormal,' Warren, the top Democrat on Senate Banking, wrote to Pulte. 'Your behavior raises significant questions about your judgment and commitment to operating FHFA in a responsible, competent, and lawful manner.'
The FHFA did not respond to a request for comment.
In the books— Trump on Friday signed the first major congressional overhaul of cryptocurrency rules into law, Jasper Goodman reports. The GENIUS Act creates bespoke rules for dollar-pegged stablecoins.
— And as Declan Harty writes, the new law 'could clear the way for Americans to view crypto as not just a speculative investment but as a lightning-fast way to conduct transactions by circumventing traditional financial players like credit-card intermediaries.'
At the regulators
Warning — Outgoing Public Company Accounting Oversight Board Chair Erica Williams told Declan that the SEC's shakeup of the industry watchdog is coming as market volatility and a tight economy necessitate strict oversight of companies' audits. 'History tells us what happens when the economy is tight: People cook the books,' she said.
Banks v. crypto — The banking lobby is urging the Office of the Comptroller of the Currency to hold off on applications by multiple crypto firms seeking national charters, Victoria Guida reports.
In The Economy
The grocery economy — The GOP megabill's cuts to the Supplemental Nutrition Assistance Program are poised to devastate independent grocery stores that are concentrated in Trump-friendly low-income communities, Rachel Shin reports.
Dissent incoming? — In an interview with Bloomberg TV on Friday, Fed Gov. Christopher Waller hinted that he might dissent if his fellow central bank policymakers move to hold rates steady when they meet next week. Waller has argued that a slowdown in private sector hiring necessitates a cut.
What a pisser — Per The Washington Post's David Lynch: 'The tariffs imposed to date also have had some presumably unintended effects. The U.S., for example, is now more dependent upon Russia for urea, a common fertilizer used to grow crops such as wheat, corn and rice.'
Wall Street
What's the bet? — The possibility that Trump may attempt to fire Powell has created a new trade for Wall Street investors. Here's a big one, per Bloomberg's Ye Xie: 'Buy two-year Treasuries and sell US 10-year notes.'
'Woke' political risk — Trump threatened to block a deal that would allow the NFL's Washington Commanders to build a new stadium in DC 'if they don't change the name back to the original 'Washington Redskins,'' POLITICO's Cheyanne Daniels reports. The team's owner Josh Harris — a co-founder of the private credit behemoth Apollo Global Management — said in February that the team wouldn't be changing its name anytime soon.
'Anti-woke' political risk — The NYT's Mike Isaac and Ryan Mac have a story about how the Silicon Valley venture powerhouse Sequoia Capital is facing blowback from partner Shaun Maguire's ultra-MAGA social media presence. Maguire's recent X post claiming that New York City mayoral candidate Zohran Mamdani is lying to advance 'his Islamist agenda' has been blasted by tech industry participants for being Islamophobic.
Jobs report
Wharton professor Christina Parajon Skinner, a former legal counsel at the Bank of England, has joined Treasury as a deputy assistant secretary for the Financial Stability Oversight Council, according to her LinkedIn.