The Real Stakes of Trump's Fight with the Fed

with Ross Levine

When I invited economist Ross Levine onto the show, my idea was to discuss fluctuations in the treasury bond market and the potential effects of Trump’s tariffs. I also wanted to know how much pressure Trump can apply to Fed Chair Jerome Powell. He can make Powell’s job so difficult and unpleasant that stepping down would seem like an appealing option, but it’s not clear that he has the power to fire Powell outright. Trump wants the Fed to lower interest rates—cheaper credit would, he seems to think, take the edge off tariff-induced hits to the economy. But the Fed is still wary of inflation and doesn’t seem inclined to move interest rates at all.

As Ross sees it, tension between Trump and the Fed are about much more than interest rates. Trump is vying for control over independent federal agencies. The administration argues that, since the agencies fall under the executive branch, the president should have the power to fire their heads. Ross worries that, if Trump’s bid is successful, he would gain unprecedented leverage over the country’s financial institutions and their (by some estimates) $150 trillion in assets. He would be able to pick winners and losers, to extend or withdraw credit from borrowers, and to reward and punish whomever he pleases.

The Supreme Court will eventually decide whether Trump has that power or not. If it rules that he does, he won’t even have to use it in order for it to change how financial institutions behave. Those fearing his retribution will likely act in accordance with what they believe his wishes to be rather than risk drawing his ire. He’s already demonstrated that he’s willing to use the powers of the executive branch to strong-arm private universities into alignment with his political vision. Imagine that same approach exercised on the entire financial sector. That’s what makes the scenario Ross describes so potentially dangerous.

Perhaps Trump supporters will think it’s a good thing that he can enact his agenda through the passive threat of financial manipulation. I can understand the appeal. But that power will also extend to whoever next holds office. As we’ve seen, once the executive branch arrogates power to itself for a specific purpose, it rarely relinquishes it. The question is not whether Trump is personally fit to exercise the power he seeks, but whether any president should have it to exercise at all. The president already has one nuclear arsenal at his disposal. Do we want to give him the financial equivalent of another?

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GLENN LOURY: What is the nature of the threat to the Fed? I've been reading pieces in the newspaper recently that Trump has been tweeting and making noises about Jerome Powell. He couldn't leave too soon, it'd be too soon, etc. He wants a low-interest-friendly policy from the Fed, and the Fed is worried about inflation. Is that what's going on?

ROSS LEVINE: I want to emphasize that there are two challenges to Fed independence. They're related. One in terms of monetary policy, which is, you pointed out, the setting of interest rates, and the other is in terms of the supervision and regulation of financial institutions.

So the one that received a lot of attention this week has to do with the independence of monetary policy and the comments about Jerome Powell. And the issue there is that the Fed was constituted—and we'll come back to this—as an independent institution by Congress. And the president has largely, though there have been exceptions, kept hands off the Federal Reserve. What Trump and his lawyers are challenging now is the executive branch's ability to fire members of the the Board of Governors, which includes Powell. And what they're arguing is that, although there was a case almost a century ago that said that the president couldn't fire an agency in which the Congress has said that you could only fire members of the leading staff of an agency unless they didn't perform their job well, not just because you disagreed with them on policy. He's challenging them.

The basis of that challenge is that the Constitution mandates that the president faithfully execute the laws that are passed by Congress. And the president is arguing that, in order to be able to fulfill his constitutional mandate, he needs to be able to fire the members of agencies who he deems are not faithfully executing the laws of Congress. And one of those agencies is the Federal Reserve. And so this week the focus has been on the firing of Powell.

There's another element that was written on the White House website, and it's part of a general movement by the Trump administration, and that is to say, look, you can't really have independent agencies. The Constitution has three branches of government, and an agency has to be under the purview of one of those branches of government. Since we're talking about agencies that are executing the laws of Congress, those agencies must come under the executive branch for the same reasons I gave. How can the president fulfill his or her constitutional mandate if they can't oversee the actions of these agencies? This is the administration's argument, and this will get decided by the Supreme Court.

But I wanna point out that they are very explicit, that there's no ambiguity, that they state that this means that they will have oversight over all financial, supervisory, and regulatory actions and policies. I want to emphasize this because the assets of financial institutions in the US are about $150 trillion. Now imagine if one person can influence the flow of credit and the purchase of assets throughout all of these institutions, which stocks will succeed, which will fail, which companies will get credit, which companies won't, which companies will need to fail, and which companies will thrive.

That would be the most powerful person in the history of the planet.

That's my idea. It would be the most powerful person in the history of the planet. Now, it is an elected official. However, that type of power dwarfs whether you can manipulate the interest rate a little bit here and there.

What would he do if he were up to no good with that kind of power?

So I can answer the question, but I do want to preface it by saying I don't know what his intentions are. I'm not predicting or inside the head or have any inside information about what anybody wants to do.

One-hundred-fifty trillion. That's more than cumulative global GDP.

Yes. You do have double counting. But if you just look up on the Federal Reserve website what the total assets of financial institutions are, that's the number you'll capture. There is some double counting. It doesn't matter. If you made it half that, it wouldn't matter, right?

Yeah. So you don't know what he's intending to do. But ...

I have no idea what he's intending to do. I have no idea whether he will do anything. But with that much power, let's say you want certain constituencies to have access to low-cost credit. You could easily make that happen. In fact, financial institutions themselves would be guessing that's what you want. You may not even have to be explicit. Let's say I'm the president and you're the head of JP Morgan. You know what my interests are. You know I have the power to influence your wellbeing.

I see. I don't even have to use it.

I could probably get the supervisors to fire you, so I wouldn't even have to say anything to you. You would simply act in a way that you think would please me. Let's say there are people that are my enemies, and let's say I wanted to exact retribution. This could all be done in reverse. Maybe they don't get credit. Maybe their businesses fail.

Let's say there are certain stock prices that I think I would rather have go up or that I would rather have go down. There are a whole set of financial institutions making those decisions that could make that happen. The implications are simply not being appreciated by the public and I don't think by politicians. So all of this stuff about tariffs and all of this stuff about the Fed to me is way less important than having your finger on lever of $150 trillion of assets.

Where is Congress while this threat to the integrity of financial regulation and management of the federal government is unfolding?

Yeah, where is Congress? Do we have a Congress? I don't know. Because even if they're not interested in the financial regulation part, what about the independence of monetary policy? What are their views on the tariffs? All of these actions are being taken because there's a declaration of an emergency. Congress could say, “No, there's no emergency,” and take back those powers. Where is Congress?

I think's there's a partisan divide. The Republicans are in control of both houses. They're not likely to develop any initiatives that the president doesn't approve of, because they're political creatures and he's got political influence as well as this potential financial influence. And so they're keeping their heads down.

Ross Levine: Yeah, that's what the senator from Alaska, [Lisa Murkowski], said in an interview, I think, that she was afraid, that we're all afraid of the retribution that would come to them if they opposed the president's policy.

Q: What do you have to say to people who are afraid or who represent people who are afraid?

LISA MURKOWSKI: We are all afraid, okay? And I'll tell you, I am oftentimes very anxious myself about using my voice, because retaliation is real. And that's not right. But I've gotta figure out how I can do my best to help the many who are so anxious and are so afraid.

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