logo
Fed reform may move markets more than Powell ouster

Fed reform may move markets more than Powell ouster

Reuters6 days ago
LONDON, July 22 (Reuters) - Changing the way the Federal Reserve operates or assesses the economy may have a more durable impact on policy and markets than firing the Fed boss.
U.S. Treasury Secretary Scott Bessent added another twist to President Donald Trump's ongoing criticism of Fed Chair Jerome Powell on Monday by claiming he wanted to review the entire Fed institution and its performance.
In an interview with CNBC, Bessent claimed the Fed's "fear-mongering over tariffs" without significant signs of inflation was justification for considering a root-and-branch review of the central bank's functioning.
"What we need to do is examine the entire Federal Reserve institution and whether they have been successful," he said. "All these PhDs over there, I don't know what they do."
It's not yet clear whether Bessent was merely heaping more pressure on the Fed to speed up interest rate cuts, as Trump has been demanding almost daily, or whether the administration is actually planning to conduct a formal review of Fed operations, analysis and execution.
While recent weeks have been filled with anxious noise about Trump attempting to fire Powell, this latest development - possible changes to the way the Fed ticks - could be much more far-reaching and impactful than simply truncating the tenure of one Chair.
Of course, the Fed Chair is an important role, and a politically motivated ouster would be a serious challenge to Fed independence. Yet the Fed boss ultimately remains just one vote on the rate-setting board, and the Fed's policymaking structure is partly designed to insulate the central bank from any undue political influence.
The Federal Open Market Committee that sets policy is made up of seven Fed board members and five regional Fed bosses, but the FOMC chair and vice chair are voted in by the committee at the start of each year. The Fed Chair typically takes the helm by convention, but not necessity.
If a majority of the FOMC members balked at a politically partisan appointee to the top job, they could theoretically vote for a different Chair of the FOMC in an act of defiance.
But, regardless, the Chair is still only one vote.
Changing the Fed's institutional structure would require Congressional approval, a process likely to be protracted as many Republicans, including strong Trump supporters, may be wary of tampering with the Fed.
Moreover, a recent Supreme Court ruling also suggested Fed structures should be left in place due to "a special historical status".
But influencing the way the Fed thinks, forecasts and operates is a different matter.
To complicate matters further, the Wall Street Journal on Monday claimed Bessent counseled Trump against firing Powell, arguing that the current Fed Chair might sue, or Congress could drag its feet on approving a replacement. Both scenarios could result in a leadership hiatus that would see Joe Biden appointee Vice Fed Chair Philip Jefferson assume the role.
Bessent argued the price of removing Powell now was potential market disruption and economic uncertainty for no real gain in influence compared with waiting for Powell's term to just expire in May, the WSJ said.
Trump, already battling with the WSJ on another story, dismissed the report as 'fake'. Bessent said the decision was ultimately up to Trump.
But the messiness of Powell's removal may be why the administration sees other pressure on the Fed to buckle on rates soon as more fruitful.
After all, two Trump appointees to the board - Christopher Waller and Michelle Bowman - already arguing for immediate cuts and two more board positions, including Powell's, are likely to come up by this time next year. That would leave a majority on the board being Trump appointees - even though not the FOMC.
SGH Macro Advisors' Tim Duy reckons that to reshape the Fed, the White House needs even more seats to shift the board - building a block of Trump nominees sufficient to out-vote the five regional Presidents that make up the rest of the FOMC.
Without that, it leaves the Trump team trying to change the DNA of Fed thinking and a major review that shifts standing assumptions, forecasting patterns and public presentations may be significant longer-term.
Current favorite to be Trump's pick for the Chair, former Fed policymaker Kevin Warsh, who is a known critic of orthodox Fed analysis, doubts there's a trade-off between jobs and inflation the way it's currently presented and claims rates can move lower if balance sheet policies were tighter.
If markets think it's inappropriate to ease now, of course, then inflation expectations may just build on fears of undue political influence and long-term borrowing rates should rise.
But it may not be that clean.
"The goal appears to be to keep policy rates low while shifting U.S. Treasury issuance to the front end of the curve," wrote SGH Macro's Duy. "While excessively loose policy would be expected to raise long term rates, there is the possibility that Fed and Treasury manage the debt with an eye toward yield curve control."
That's a delicate balance that might come off - but guaranteeing the Fed comes on board will not be easy.
The opinions expressed here are those of the author, a columnist for Reuters
-- Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn. Plus, sign up for my weekday newsletter Morning Bid U.S.
Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

Trump visit live: Starmer to push US president to resume role in Gaza ceasefire talks
Trump visit live: Starmer to push US president to resume role in Gaza ceasefire talks

The Independent

time4 minutes ago

  • The Independent

Trump visit live: Starmer to push US president to resume role in Gaza ceasefire talks

Sir Keir Starmer is expected to press Donald Trump on the revival of ceasefire talks between Israel and Hamas as the UK joins efforts to airdrop aid into Gaza. The prime minister will travel to meet the US president during his visit to Scotland amid mounting global anger over the humanitarian conditions in the war-torn enclave. Ceasefire talks in Qatar ground to a standstill this week after America and Israel withdrew negotiating teams from the country, with US special envoy Steve Witkoff accusing Hamas of a 'lack of desire' to reach an agreement. The deal under discussion was expected to include a 60-day ceasefire, and aid supplies would be ramped up as conditions for a lasting truce were brokered. Sir Keir will raise Washington's work with partners in Qatar and Egypt during his talks with Mr Trump and seek to discuss what more can be done to urgently bring about a ceasefire, it is understood. They will also discuss the recently agreed US-UK trade deal and the war in Ukraine.

Donald Trump in Scotland LIVE as President set to meet Keir Starmer
Donald Trump in Scotland LIVE as President set to meet Keir Starmer

Daily Record

time4 minutes ago

  • Daily Record

Donald Trump in Scotland LIVE as President set to meet Keir Starmer

Video Loading Keir Starmer will raise the humanitarian crisis in Gaza and try to seal a US trade deal during a high-stakes summit with Donald Trump later today. The Prime Minister will also demand tough action against Vladimir Putin when he meets the US President at Turnberry. The Republican arrived at Prestwick airport on Friday to kickstart a five day trip that will combine golf and political meetings. He played his Turnberry course over the weekend and will travel to his other golf club at the Menie Estate in Aberdeenshire on Monday as well.

French ministers say EU-US trade deal has merits but is also unbalanced
French ministers say EU-US trade deal has merits but is also unbalanced

Reuters

time4 minutes ago

  • Reuters

French ministers say EU-US trade deal has merits but is also unbalanced

PARIS, July 28 (Reuters) - French government ministers said a framework trade deal between the United States and European Union had some merits - such as exemptions for some key French business sectors such as spirits - but was nevertheless unbalanced. "The trade agreement negotiated by the European Commission with the United States will bring temporary stability to economic actors threatened by the escalation of American tariffs, but it is unbalanced," wrote French European Affairs Minister Benjamin Haddad on X. That view was echoed by France's industry minister Marc Ferracci, who said more talks - which could last weeks or months - would be needed before the deal could be formally concluded. Ferracci told RTL radio that more needed to be done in terms of rebalancing the EU's trade relations with the U.S. "This is not the end of the story," Ferracci told RTL.

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into a world of global content with local flavor? Download Daily8 app today from your preferred app store and start exploring.
app-storeplay-store