Make way for Powell! Trump's campaign team is targeting the Fed again

Trump's campaign team is studying steps to exclude Federal Reserve Chairman Powell if the former president returns to the White House.

Trump economic adviser Scott Bessent suggested in an interview with Barron's that Congress approve a nominee for Federal Reserve Chairman more than a year before Powell's term ends in May 2026. This would effectively insert a "nanny" next to the current Federal Reserve Chairman and may make Powell a lame duck for the remainder of his term.

According to a recent report by The Wall Street Journal, Bessent, founder of hedge fund Key Square Group, is on the list of candidates for Treasury Secretary in Trump's second term.

Bessent told Barron's, "You can make the earliest nomination for the Fed and create a 'Shadow Fed Chair.' Based on the concept of forward guidance, no one will really care what Powell has to say anymore."

Trump's campaign team approves

In the latter part of Trump's previous term, his relationship with the Federal Reserve Chairman he appointed became increasingly tense. Powell repeatedly ignored White House requests to stimulate the economy by lowering interest rates to help the president's re-election pressure. Lengthy Twitter rants against Powell became commonplace.

Bessent said he has been spreading the plan to sideline Powell among Trump's campaign advisers, and the plan has received approval. However, this is not official policy, at least not yet.

"This is my idea," the hedge fund manager added, "not the potential president's idea."

A "bad" idea

Trump openly expressed a desire to weaken the Federal Reserve's precious independence, citing his so-called business acumen. This has led to comparisons with Nixon, whose administration's Federal Reserve Chairman is widely regarded as one of the worst in recent history.

Ed Yardeni, president of Yardeni Research, told Barron's that this is a "bad" idea. A "Shadow Fed Chair" will "create a lot of noise in the markets," leading investors to speculate on who in the Federal Open Market Committee (FOMC) matters more. "Everyone will be looking at the calendar to see when Powell leaves," he said.

The independence of the Federal Reserve from White House and congressional political influence is considered sacrosanct. This is a key prerequisite for responsible monetary policy, with stable prices at its core.

Just look at countries like Turkey to understand what happens when a head of state artificially keeps monetary policy rates low by using authority to dismiss central bank governors who do not comply.

The result is double-digit inflation, with people fleeing the Turkish lira for anything that can better store value, whether it's the dollar, gold, or cryptocurrencies

The Reputation Damage of the Federal Reserve

In the past, the idea of Trump weakening the independence of the Federal Reserve would have faced strong opposition from all sides.

However, the reputation of the Federal Reserve has been damaged as it repeatedly misjudged the surging post-pandemic inflation as "transitory". Subsequently, Federal Reserve officials launched a series of aggressive rate hikes in 2022 to correct their mistakes and put the inflation genie back in the bottle.

Nevertheless, Powell has recently earned praise for gradually bringing inflation down from its peak of over 9% two years ago.

In recent months, inflation has fallen back to around the Federal Reserve's 2% target, despite the active U.S. economy continuing to expand at a modest pace in a strong job market