'Do my bidding as I ask for it': Morris on message of Trump's threats to the U.S. Fed

Key Concepts

• Federal Reserve Independence: The degree to which the Federal Reserve can operate without political interference.
• FOMC (Federal Open Market Committee): The body within the Federal Reserve System responsible for setting monetary policy.
• Politicization of the Fed: The influence of political agendas on the Federal Reserve’s decision-making processes.
• Trumpian Vengeance: A reference to former President Trump’s tendency to pursue retribution against perceived enemies.
• Tariffs & Inflation: The potential inflationary impact of tariffs imposed by the executive branch.
• Regional Fed Presidents: The heads of the twelve regional Federal Reserve Banks, who participate in the FOMC.

The US Federal Reserve Under Pressure: A Breakdown of Recent Developments

Introduction

The video discusses the recent threats made by the Trump administration against Federal Reserve Chair Jerome Powell, the subsequent market reaction, and the broader implications for the independence of the Federal Reserve. It features an interview with Alex Moore, CEO & CIO of FM Investments, who provides analysis on the situation and its potential impact on investors and monetary policy.

I. Initial Market Reaction & Trump’s Motivations

The initial reaction to the Trump administration’s threats against Jerome Powell was one of alarm, but the markets quickly “shrugged it off,” with the S&P 500 reaching new heights. Alex Moore attributes this to a growing acceptance of President Trump’s tendency to “politicize processes” and pursue “Trumpian vengeance” – a relentless quest for loyalty, even within institutions like the Federal Reserve. The threats, including subpoenas and criminal investigations, are seen as attempts to exert control over the Fed and secure a more compliant chair. As Moore states, “Trumpian vengeance is very real and unbounded certainly in the president's quest to find loyalty in the Federal Reserve.”

II. Support for Powell & Defense of Fed Independence

Despite the presidential pressure, Powell is receiving support from various sources. Senator Tillis and Marowski have indicated a willingness to obstruct any attempts to undermine the Fed’s independence, potentially through the Supreme Court. The Supreme Court itself has previously affirmed the importance of the Fed’s independence. This expanding support network is reassuring the market that any significant interference is unlikely in the short term. Moore notes that this situation represents Powell’s “first real plea for more support” and that the market is realizing “we’re a long way away from anything happening.”

III. Erosion of Fed Independence – A Historical Perspective

Moore argues that the Fed’s independence has been gradually eroding for some time, particularly through the political confirmation process for board members. He points out that the Senate has increasingly intervened to ensure that presidents can appoint individuals aligned with their policies, delaying or blocking nominees who might oppose the administration’s agenda. While acknowledging this erosion, he also highlights the current “retrenchment from the Fed and from the folks who the Fed works for, Congress, to defend that independence.” He suggests that the perceived independence was “mythical” to begin with, having been chipped away over time through various financial crises and political pressures.

IV. The Next Fed Chair & Potential for Increased Political Influence

With Powell’s term nearing its end, the prospect of a Trump-appointed successor raises concerns about further politicization. The market anticipates either Kevin Warsh or Scott Brown as potential candidates, with Warsh currently favored. Moore emphasizes that the president is signaling a clear expectation for the next chair: “Do my bidding as I ask for it.” Trump’s dissatisfaction with Powell stems from the belief that he did not deliver on the president’s desired policies, describing him as not being a “toad in the Eckles building.”

V. Inflation Concerns & the Impact of Tariffs

Moore expresses concern about the potential for increased inflation if a politically motivated chair is appointed. He notes that the Fed board itself has voiced concerns about the inflationary effects of tariffs and broader policy decisions. This concern is echoed by the historical market reaction to Trump’s first year in office, marked by volatility.

VI. Powell’s Potential Role After May & the Balance of Power

A critical point discussed is Powell’s governorship continuing until 2028 even after stepping down as chair in May. Historically, most chairs have left their positions entirely when their chairmanship ends. However, Moore suggests Powell might remain to serve as a “last firebreak for true Fed independence.” His continued presence could be crucial, as his departure would allow the president to appoint a replacement, potentially giving the executive branch a majority on the Board of Governors. This majority would then have the power to appoint regional Fed presidents, effectively controlling the composition of the FOMC and influencing monetary policy. Moore explains that Powell could become a “critical turn vote” preventing potentially harmful policies. He states, “That majority would allow them to hire and fire regional Fed presidents and therefore the makeup of the FOMC which sets policy rate policy more or less at their will and fill it up with court cheers that are willing to enact policy that probably is not helpful for inflation or for the what the Fed has been working on the last two two to three years.”

VII. Gold as a Safe Haven & Future Volatility

The discussion references the historical tendency for gold prices to rise during periods of political uncertainty, as seen during Trump’s first year in office. Moore anticipates continued volatility and “political and markets noise” stemming from the situation.

Conclusion

The interview highlights the increasing political pressure on the Federal Reserve and the potential consequences for its independence and monetary policy. While the market has currently absorbed the initial shock of the threats against Powell, the appointment of the next Fed chair represents a significant risk. The continued presence of Powell on the board, even without the chairmanship, could be a crucial safeguard against excessive political interference, but the balance of power remains precarious. Investors should be aware of the potential for increased volatility and the risk of inflation if a politically motivated chair is appointed. The situation underscores the importance of maintaining the Federal Reserve’s independence to ensure stable and effective monetary policy.