How Trump Can Secretly Disarm Fed Chair Powell | WSJ

Summary of YouTube Video: "Trump's Shadow Fed Chair Plan: Risky Move?"

Key Concepts:

• Federal Reserve (The Fed)
• Federal Open Market Committee (FOMC)
• Monetary Policy
• Interest Rates
• Board of Governors
• Shadow Fed Chair
• Confirmation Hearing
• Lame Duck
• Sycophant
• Credibility of the Fed

1. The Impetus for a "Shadow Fed Chair": Trump's Displeasure with Powell

• President Trump is reportedly considering naming a replacement for Federal Reserve Chair Jerome Powell earlier than the typical transition period due to his dissatisfaction with Powell's monetary policy decisions, specifically regarding interest rates. Trump believes Powell is "too late" and not lowering interest rates enough.
• Trump has expressed a desire for interest rates to be as low or lower than 1%, significantly below the current range of 4.25 to 4.50%.
• The Supreme Court has seemingly limited Trump's ability to directly fire Powell.

2. How a "Shadow Fed Chair" Would Work:

• The idea involves announcing Trump's pick for the next Fed chair well in advance of Powell's term ending (May 2026 for the chair position, January 2028 for his term on the board).
• This would effectively make Powell a "lame duck," potentially undermining his authority and influencing the direction of monetary policy.
• Trump could nominate someone to fill Adriana Kugler's seat on the Board of Governors when her term ends in January and then appoint that person as Fed chair when Powell's term as chair is over.

3. Risks and Potential Drawbacks of a "Shadow Fed Chair":

• Effectiveness: It may not significantly alter near-term monetary policy and could create confusion.
• Positioning the Chair-in-Waiting: The nominee could be forced to act as a "sycophant" to the President, potentially damaging their credibility with financial markets. Financial markets want to know that the Fed is still on the job when it comes to preventing big increases in inflation.
• Potential for Disagreement: The nominee risks losing the appointment if their views diverge from the President's.
• Powell's Response: Powell could choose to remain on the Board of Governors after his term as chair ends, potentially creating internal conflict and further undermining the Fed's credibility.

4. The Shadow Open Market Committee vs. a "Shadow Fed Chair":

• Jeffrey Lacker, former president of the Federal Reserve Bank of Richmond, distinguishes the proposed "Shadow Fed Chair" from the existing Shadow Open Market Committee.
• The Shadow Open Market Committee bases its commentary on economic science, monetary economics, and monetary history.

5. Potential Candidates for Fed Chair:

• The video mentions several potential candidates being considered by Trump:
  • Kevin Warsh: A former Fed Governor and advisor to President George W. Bush. Trump considered him in 2017 but reportedly thought he looked too young.
  • Kevin Hassett: Director of Trump's National Economic Council and former Chairman of the Council of Economic Advisers.
  • Scott Bessent: Has not denied speculation about his interest in the job.
  • Chris Waller: Current Fed Governor.

6. The Senate's Role in Confirmation:

• Even if Trump nominates a candidate, the Senate must confirm the appointment.
• The Senate will likely scrutinize the nominee's temperament and independence, particularly given Trump's explicit desire for someone who will follow his directives.
• Getting at least 50 senators to vote "yes" could be difficult.

7. The Limits of the Fed Chair's Power:

• The Fed chair is just the chair of a committee with diverse views and cannot unilaterally dictate policy.

8. Conclusion:

• Creating a "Shadow Fed Chair" is a risky and unprecedented move that could undermine the Fed's credibility, create internal conflict, and potentially fail to achieve Trump's desired policy outcomes. The success of such a strategy depends on various factors, including the nominee's willingness to align with Trump's views, the Senate's confirmation process, and Powell's potential response. The Senate cares about the temperament of the nominee.