Welcome to the WC, wherein you’re trapped in my mind for eight to ten minutes weekly.
I’m stepping way outside my comfort zone today to understand a Trump policy proposal that’s gone a bit under the radar: nuking the Fed.
While I “studied” macroeconomics during my undergrad and MBA courses, my grades were nothing to write home about, so take everything below with a grain of salt.
- What has Trump Promised?
- Why it might be a good thing
- What are the risks?
- Has it worked before?
- How can investors prepare
Have a read-through, and let me know what you think.
Should Trump take over the fed?
Yes, the benefits outweigh the risks
What? No, of course not
What’s a Fed?
Let’s go.
Table of Contents
What has Trump Said?
Donald Trump’s public musings on the Federal Reserve suggest he’d prefer the institution to be a tad more—shall we say—accommodating. He sees the Fed’s staunch independence as an occasional roadblock to economic growth, especially when monetary policy feels, in his view, unnecessarily tight. Trump’s interest in reining in the Fed’s autonomy, or even bringing it under executive control, underscores his desire to align monetary policy directly with political objectives.
Why Trump Wants to Influence the Fed
Political Leverage Over Economic Growth: Trump isn’t exactly shy about criticizing the Fed, particularly when it hikes interest rates or adopts policies that could slow down the economy. In his playbook, lower interest rates are the secret sauce for stimulating growth—benefiting both the economy and his political standing. A more compliant Fed could serve as a handy tool to craft favorable economic conditions, especially when election season rolls around.
Alignment with Fiscal Policy: Trump’s economic strategies often involve significant fiscal spending—think tax cuts and ambitious infrastructure projects. He believes these initiatives would pack a bigger punch in a low-interest-rate environment. But when the Fed operates independently and spots inflation risks, it might counteract his efforts by tightening monetary policy. Limiting the Fed’s independence could help ensure that monetary policy doesn’t throw a wrench into his fiscal plans.
Less Emphasis on Inflation Control: Traditionally, the Fed balances its dual mandate by raising rates to keep inflation in check, sometimes at the expense of rapid growth. Trump, however, seems to prioritize economic expansion and employment over inflation concerns. He appears to view the Fed’s independence as less crucial if it stands in the way of revving up the economy.
Why it might be a good thing
Advocates think we could unlock a new level of economic coordination by reimagining the Fed’s role as more of a team player with the executive branch. Whether that’s a recipe for sustained prosperity or a short-term fix with long-term risks is debatable. But the potential upsides make it a conversation worth having.
Easing Up on Inflation Worries
Traditionally, the Fed has been juggling the dual roles of maximizing employment and keeping inflation in check—a bit like trying to ride two horses with one saddle. Trump seems inclined to shift that balance, favoring aggressive growth even if it means letting inflation run hotter. The argument? A sprinkle of inflation might be a small price for robust economic expansion and job creation.
Accelerating Growth Through Monetary Policy
A president could push for policies laser-focused on economic growth by having more sway over the Fed. Think lower interest rates, a bit of quantitative easing—a financial caffeine boost. Advocates say this could make the economy more responsive to the will of elected leaders, those directly accountable to the voters. Picture monetary and fiscal policies humming harmoniously, amplifying the other’s impact.
Reducing Policy Tug-of-War
When monetary and fiscal policies pull in opposite directions, it’s like trying to drive a car with one foot on the gas and the other on the brake—not exactly efficient. Responses could be streamlined if both policies are orchestrated under one executive umbrella. Tax cuts and spending initiatives would theoretically pack more punch in a low-interest-rate environment, making government borrowing cheaper and big projects more feasible.
Harvesting Short-Term Political Gains
From a political vantage point, easy access to growth-oriented monetary policy can yield immediate economic fruits—ripe for the picking come election season. A surging economy might translate to higher approval ratings and a stronger mandate. Aligning the Fed’s policies with the executive’s goals could, in this light, seem like a savvy strategy to bolster both economic performance and political capital.
What are the risks?
By compromising the Fed’s autonomy, there’s a real risk of jeopardizing both economic stability and global confidence. While the allure of syncing up fiscal and monetary policy under one roof might seem advantageous for quick wins, the long-term consequences could be decidedly less rosy. It’s a bit like swapping out your seasoned ship captain for someone who’s more interested in speed than navigation—you might get somewhere fast, but it might not be where you wanted to go.
Inflation Could Run Amok
When politics commandeer monetary policy, there’s a hefty temptation to prioritize immediate growth over keeping prices in check. Unchecked political control often leads to economic strategies that ignore the lurking menace of inflation. The result? A surge in inflation that gnaws away at consumers’ purchasing power, prompting a vicious cycle that’s tougher to break than a bad habit. It’s like throwing fuel on a fire—you get a big blaze now, but you might burn down the house in the process.
Eroding Credibility on the Global Stage
The Fed’s independence isn’t just a ceremonial tradition; it’s a cornerstone of the U.S. economy’s credibility. Global investors view it as a stabilizing force, the economic equivalent of a trusted referee. Undermining this could be akin to switching out that referee for a player-coach—not exactly confidence-inspiring. Reduced trust might lead to decreased investment, higher borrowing costs, and a weaker dollar. In short, turning the Fed into a political tool could spook the very markets the economy relies on.
Inviting Economic Whiplash
Long-term economic health is a delicate balance between growth and stability. History has a way of showing that when this balance tips too far toward political expediency, economies can become as volatile as a soap opera plot twist. We’re talking more frequent booms and busts—economic roller coasters that leave everyone feeling a bit queasy. Countries with politicized central banks—think Argentina or Zimbabwe—serve as cautionary tales. They’ve grappled with higher inflation and economic turbulence that might have been avoided with an independent monetary policy.
Has it worked before?
History offers mixed results when governments take the reins of monetary policy. Let’s look at examples of central banks that lost their independence or came under significant government influence.
When it hasn’t worked
🇹🇷 Turkey (2018–Present)
- What Happened: Starting in 2018, President Recep Tayyip Erdoğan increasingly meddled with Turkey’s central bank. He removed multiple governors who didn’t align with his unconventional belief that high interest rates cause inflation—a stance that flies in the face of economic consensus.
- The Outcome: This interference led to soaring inflation and a plummeting Turkish lira. At one point in 2022, inflation roared past 80%, eroding consumer purchasing power and rattling investor confidence. It’s a textbook case of how political meddling can destabilize an economy.
🇦🇷 Argentina (2010s–Present)
- What Happened: Argentina’s central bank has faced persistent political pressure to fund public deficits and enforce currency controls, often at the expense of prudent monetary policy.
- The Outcome: The result? High inflation frequently exceeding 50% annually, currency instability, and capital flight. Investors lost confidence, and the economy grappled with recurring crises. It’s a stark reminder that sacrificing central bank independence can lead to long-term economic pain for short-term political gain.
🇻🇪 Venezuela (2000s–Present)
- What Happened: Under Presidents Hugo Chávez and Nicolás Maduro, Venezuela’s central bank became more of a political puppet than an independent institution. The government directed extensive money printing to cover deficits and fund expansive social programs.
- The Outcome: This led to hyperinflation of epic proportions, economic collapse, severe poverty, and shortages of basic goods. At its worst, Venezuela’s inflation rate hit astronomical levels, rendering the currency virtually worthless and devastating the economy.
🇿🇼 Zimbabwe (2000s)
- What Happened: The Reserve Bank of Zimbabwe was commandeered to print money at the government’s behest, aiming to fund massive fiscal deficits under President Robert Mugabe.
- The Outcome: Zimbabwe experienced one of the most extreme cases of hyperinflation in history, with monthly inflation rates reaching billions of percent by 2008. The Zimbabwean dollar became so devalued that the country eventually abandoned its currency altogether. It’s an extreme example of how things can spiral when monetary policy becomes a political tool.
🇭🇺 Hungary (2010s)
- What Happened: Under Prime Minister Viktor Orbán, Hungary’s central bank saw increased political influence. Allies were installed in key positions, and monetary policy began to closely mirror government objectives.
- The Outcome: While Hungary didn’t descend into hyperinflation, investor confidence took a hit. Concerns about financial stability surfaced, and tensions grew with the European Union over the erosion of institutional independence.
Where it’s (mostly) worked
🇺🇸 United States (1940s)
- What Happened: During World War II, the Federal Reserve temporarily set aside some of its independence to help finance the war effort. It agreed to peg interest rates to keep government borrowing costs low.
- The Outcome: Inflation was kept moderate, and the economy witnessed rapid growth during and after the war. In 1951, the Fed regained complete independence through the Treasury-Federal Reserve Accord. This episode is often cited as a successful, short-term alignment of monetary policy with government needs.
🇮🇱 Israel (1985)
- What Happened: Facing runaway inflation in the 1980s, the Israeli government launched an “Economic Stabilization Plan,” temporarily exerting more control over the central bank to address the crisis.
- The Outcome: The plan successfully curbed hyperinflation and stabilized the economy. After achieving its objectives, the central bank’s independence was restored. It’s a case where temporary government intervention, executed wisely, helped steer the economy back on course.
🇬🇧 United Kingdom (1930s)
- What Happened: Amid the Great Depression, the British government worked closely with the Bank of England to manage economic recovery efforts, particularly after abandoning the gold standard in 1931.
- The Outcome: The U.K. economy recovered more swiftly than some of its counterparts, benefiting from this coordinated approach. While the Bank of England operated under government influence for much of the 20th century, it formally regained independence in 1997.
The Takeaway
While temporary government intervention in central banking can work, these are generally exceptions rather than the rule. Short-term, targeted measures—like those in the U.S. during WWII or Israel in 1985—were successful because they had specific goals and clear exit strategies.
In contrast, sustained political control over central banks often leads to economic instability, rampant inflation, and loss of investor confidence. The experiences of Turkey, Argentina, Venezuela, and Zimbabwe serve as cautionary tales. They illustrate how eroding central bank independence can unleash a host of economic woes, turning short-term political ambitions into long-term national crises.
How can investors prepare
If Trump takes over the Fed, leading to lower interest rates and more growth-focused policies, the investment landscape could shift dramatically. Here are a few ideas you may want to consider:
1. Chase Growth with Strategic Equities
Target Sectors Poised to Benefit
- Technology and Innovation: Lower interest rates can be a boon for tech companies, especially high-growth firms that thrive on cheap capital. Investing in technology stocks could be like catching a ride on a rocket—just make sure it’s headed to the moon, not the sun.
- Consumer Discretionary and Industrials: Sectors that benefit from increased consumer spending and economic expansion may see substantial gains. Think of companies producing consumer goods, automobiles, and industrial equipment.
Protect yourself by focusing on companies with strong fundamentals and solid growth prospects. The goal is to ride the wave of economic expansion without wiping out when the tide shifts.
2. Real Estate Reigns Supreme
Capitalize on Lower Borrowing Costs
- Real Estate Investment Trusts (REITs): With cheaper financing, demand for real estate often surges. REITs focusing on commercial, residential, or industrial properties can offer attractive dividends and potential capital appreciation.
- Homebuilders and Developers: Lower interest rates boost housing affordability, potentially igniting a boom in home construction and sales. Investing in companies that build or supply the housing market could yield significant returns.
Keep an eye on regional market dynamics. Not all real estate markets respond equally to interest rate shifts, so targeted investments might outperform broad strokes.
3. Hedge with Gold and Precious Metals
Protect Against Inflation and Dollar Weakness
- Gold as an Inflation Hedge: Inflationary pressures might mount if monetary policy leans too heavily toward growth. Gold and other precious metals can be safe havens during inflationary periods.
- Diversify with Commodities: A weaker dollar can make commodities priced in dollars more attractive globally. Broad exposure to commodities might offer growth and a hedge against currency devaluation.
Precious metals often don’t generate income like stocks or bonds. They’re a defensive play, so balance them within your portfolio accordingly.
4. Explore Emerging Markets
Seek Growth Beyond U.S. Borders
- Capitalizing on Global Shifts: Lower U.S. interest rates and a potentially weaker dollar can make emerging markets more attractive to international investors. These markets might offer higher yields and more robust growth prospects.
- Invest in Local Equities and Debt: Opportunities in countries with solid economic fundamentals could outperform domestic investments. Consider markets with stable governance and favorable demographic trends.
Emerging markets have their risks, including political instability and currency fluctuations. Due diligence is paramount. They’ve also underperformed the US for quite some time.
5. Selective Plays in Financials
Understand the Nuances
- Banks and Lending Institutions: Lower rates can increase loan volumes, but margins might be squeezed. Smaller regional banks focused on lending could benefit from heightened activity.
- Alternative Finance: Non-traditional lenders and fintech companies might seize the moment to expand their footprint, especially if they can capitalize on lower borrowing costs.
Scrutinize balance sheets and business models. Not all financial institutions will successfully navigate the changing landscape.
6. Bond Strategies with Caution
Navigate Interest Rates and Inflation Expectations
- Long-Duration Bonds: Falling interest rates can boost the value of existing long-term bonds. However, if inflation expectations rise, these gains could be offset.
- Inflation-Protected Securities (TIPS): For those wary of inflation eroding bond returns, TIPS can adjust your interest income in line with inflation.
Keep a close watch on inflation indicators. Bond strategies require timing and precision in a shifting economic context.
7. Crypto and Decentralized Assets
A Modern Hedge or Just Hype?
- Bitcoin as Digital Gold: Some investors view cryptocurrencies as a hedge against inflation and currency devaluation, similar to precious metals.
- Diversification through Decentralization: Crypto assets operate outside traditional financial systems, which could appeal if confidence in central banks wanes.
Crypto is often just a levered play on traditional markets these days, so investing here may not be the hedge you’re looking for. Watch out for correlation.
8. Invest in Real Assets and Infrastructure
Anchor Your Portfolio with Tangible Investments
- Infrastructure Funds: Investments in transportation, utilities, and energy infrastructure can provide steady returns and some protection against inflation.
- Commodity Exposure: Besides precious metals, consider commodities like oil, natural gas, and agricultural products, which often perform well during inflationary periods.
Real assets can offer stability but might be less liquid. Ensure your investment horizon aligns with their liquidity profile.
Should Trump take over the fed?
Yes, the benefits outweigh the risks
What? No, of course not
What’s a Fed?
That’s all for this week; I hope you enjoyed it.
Cheers,
Wyatt
Disclosures
