As of recently, there has been a fight for the federal reserve that might shape its role within the United States government.
The Federal Reserve (or Fed for short) is the government organization that manages the flow of money in the economy. It manages the numerous federal banks across the United States, deciding policies like interest rates and using their financial power to invest into the economy. The important thing—the Fed has, historically, been an apolitical group.
Trump has taken action to challenge the Fed’s political neutrality. In November, Jeanine Pirro, attorney for D.C & political ally of Trump, approved an investigation against Federal Reserve chair, Jerome Powell. This marks the first time in the United States’ history that the chair of the Federal Reserve has ever been under criminal investigation.
The investigation against Powell was substantiated by a construction project ordered by the Federal Reserve to renovate two of its headquarters’ locations, the Marriner S. Eccles Building and another on Constitution Avenue. The Fed has claimed that the buildings have not been “comprehensively renovated” since their construction over 100 years ago, and the amount of asbestos present in the building, among other safety concerns, makes the construction project necessary.
Jerome Powell retaliated on January 11th with a two-minute video response to his federal investigation, where he criticizes the Trump administration for putting political pressure.
Trump has publicly defended the investigation against Powell, saying that the funding going towards the renovation is “…either gross incompetence or it’s theft of some kind, kickbacks. I don’t know what it is.” In fact, Trump doubled-down by nominating his own replacement for Federal Reserve chair, Kevin Warsh, who Trump hopes to appoint when Powell’s term as Fed chair ends in May this year.
Trump’s aggressive political strategy may backfire, however. After Powell’s term as chair expires, he can choose to remain on the board. On top of that, Trump’s chairman nominee will need approval from the senate, which could be a struggle. Senate members like Republican Thomas Tillis have already vowed to block Trump’s Fed nominee in light of the Powell situation.
President Trump has nominated Kevin Warsh for the position of Federal Reserve chairman. Warsh is a well-trained candidate, studying at Stanford and Harvard Law, serving as an economic advisor for the Bush administration, and previously serving the Fed from 2006-2011 as the youngest ever federal reserve governor.
Warsh has advocated aggressive policies for the Federal Reserve, including limiting the Federal Reserve’s stretch of power and shrinking the Fed’s balance. Most importantly, Warsh wants to decrease the interest rate of federal banks. Critics of Warsh claim that he is advertising this policy to appease President Trump, whose visions for the Federal Reserve have been met with defiance by current chair, Jerome Powell.
“President Trump simply wants to see lower interest rates because that always makes the economy look better than it actually is, but that can also lead to higher inflation, which is its own economic problem,” said Economics Teacher Samuel Weaver.
Historically, the Federal Reserve’s most powerful tool has been controlling the interest rates of federal banks. Controlling interest rates has always been a delicate balance for the Fed. High interest rates under the Carter administration caused unemployment to skyrocket to 10%, while a refusal to increase interest rates under the Reagan administration led to inflation to rise up to 15%. Warsh’s commitment to drastically lower interest rates may destabilize the American economy.
“Lowering interest rates typically leads to more investment spending, which drives aggregate demand. And when aggregate demand increases, which means wanting to buy more goods and services, that tends to drive prices higher. We call that demand-pull inflation, that the demand for goods and services outpaces what’s currently supplied, and so, as a result, producers start to raise their prices,” said Weaver.
Warsh would only functionally serve as a typical board member—this means having the same effective influence of every other board member, one vote for Federal Reserve policies. However, the position as chairman should not be disregarded. Most votes for the Fed’s policies tend to follow the opinion of the chairman, and the chairman also represents the Federal Reserve in its interactions with the rest of the government and the public. Warsh’s potential role as chairman would have big implications for how the rest of the world views, listens to, and trusts the Federal Reserve.
“The main role of the chair is ultimately to communicate the strategy of what the Fed is doing. For example, what Jerome Powell says to the press when they announce their decisions says more than what the actual decisions are. So, I think a lot of it will depend on how [Kevin Warsh] presents the decisions the [Federal Reserve] makes,” says Weaver.
