THE BATTLE FOR THE FED IS ABOUT MUCH MORE THAN INTEREST RATES / THE FINANCIAL TIMES OP EDITORIAL

The battle for the Fed is about much more than interest rates

Trump and his economic advisers want to narrow the central bank’s mission dramatically

Gillian Tett

© Efi Chalikopoulou

When Scott Bessent, US Treasury secretary, wants to send a message to markets, he usually turns to a business television show or friendly media forum. 

Hence his appearance on Fox TV last Wednesday, calling for the Federal Reserve to lower rates at its meeting next week.

But now, Bessent has also ventured on to unexpectedly wonky terrain: last week a niche publication called International Economy published a long essay he wrote this spring, outlining his critique of the Fed. 

(A rough summary also appeared in the Wall Street Journal.)

This is striking given that, ahead of next week’s Fed meeting, President Donald Trump has demanded not just rate cuts, but the expulsion of Lisa Cook, a board member, for alleged fraud. 

Doubly so, since Jay Powell, the Fed chair, is fighting to protect the institution’s independence and a court has halted efforts to oust Cook.

But what is most notable about Bessent’s wonkish broadside is that it does not really focus on interest rates at all. 

Instead, he chastises the Fed for allegedly muddying its mission, becoming politicised in how it has engaged in financial regulation and deployed quantitative easing.

Bessent is particularly scathing about QE, which he thinks has “uncertain theoretical underpinnings and problematic economic consequences”, since it distorts markets and raises income inequality (by inflating wealthy peoples’ assets). 

Thus he wants the Fed to adopt a “narrow mandate”, without asset purchases, to “deliver better economic outcomes and safeguard central bank independence”. 

And he stresses that such independence “is fundamental to the economic success of the United States”. 

Yes, really.

Nor is Bessent alone in such views. Kevin Warsh, a leading contender for the next Fed chair, delivered a similar message in a punchy speech at the end of April. 

So did Stephen Miran, a White House adviser who (controversially) is joining the Fed board, in a co-authored essay. 

And Kevin Hassett, another White House adviser and leading candidate for Fed chair, also signalled his opposition to QE in an open letter many years ago.

There is therefore a cabal around Trump who wants the Fed to narrow its mission. 

The endless jawboning about lowering interest rates, in other words, is only part of the tale.

What should we conclude from all this? 

I actually sympathise with some of the critique. 

While QE made sense during the initial 2008 financial crisis (and early pandemic-ridden 2020), its subsequent overuse distorted financial markets and had a mixed economic impact. 

Furthermore, calling for a review of financial regulation, and the Fed’s role in it, is not mad, given that the current framework is crazily fragmented.

But I also hate the idea of the White House trying to control financial regulation, loathe Trump’s vindictive attacks on Powell and fear that the president’s assault on Fed independence could destroy monetary credibility.

There are other objections to Bessent. 

For instance, the economist Paul Krugman, a fan of QE, loathes the Treasury secretary’s use of a so-called “gain of function” Covid analogy to frame his arguments since this is linked to the conspiracy theories that grip many in the Maga base.

Either way, as the monetary mud-slinging intensifies, there are at least four questions for investors to ponder. 

One is whether Bessent, Hassett, Warsh and Miran’s professed belief in Fed independence can survive Trump’s cavalier attacks.

A second is whether Bessent can really halt or reduce asset purchases given that the Fed has been a big buyer of Treasury bonds — and more buyers will be needed in the future. 

The more the US deficit grows, the more pressure there will be for fiscal dominance (running monetary policy to manage the debt). 

Indeed, it is already here: Trump recently justified his call for a 3 percentage point fall in interest rates by noting this would “sav[e] us $1tn a year” in interest payments.

A third question is how Bessent’s views on asset purchases might dovetail with rates. 

If Warsh, say, succeeds Powell, might he cut rates a bit to please Trump, but simultaneously shrink the balance sheet to satisfy his own hawkish instincts? 

That seems quite likely.

A fourth and final question concerns the impact for other central banks. 

The Fed is not alone in facing questions about alleged mission creep and bloat — a startling drama is currently bubbling in the central bank of New Zealand, for example.  

Don’t expect these four issues to surface at next week’s meeting, however. 

That will be dominated by discussion of rates. 

And my own guess is that the Fed will cut a little but then stay still for a while, to watch how tariffs affect inflation (or not) — particularly given Thursday’s news of price rises.

The key point is that these interest rate dramas are not the only game in town — the battle over the balance sheet and the Fed’s mission matters too. 

And if the debt keeps exploding, that fight will become even more intense. 

Brace yourselves: the really big battle around the Fed has barely begun.