Chartbook 425: War over the Fed? Is this "The Big One" or will it be another moment of American nihilism?
The Trump administration, or some parts of it, have declared war on the US Federal Reserve. The statement issued by Fed Chair Jerome Powell on Sunday in response to the threat of criminal investigation, is worth watching.
The key passage from the transcript is here:
This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.
As Cameron Crise at Bloomberg commented: "Powell has striven mightily to refuse comment on all political issues and pressure throughout his term, but the DOJ subpoenas were evidently the straw that broke the camel’s back, and the Fed chief finally said the quiet part out loud..."
Is this “The Big One”, the fabled, long-awaited quake that brings the weight of the world’s bond markets down on Trump 2.0’s radical MAGA experiment?
Unsurprisingly, there has been a surge in talk about debasement online.
Gold and silver are the beneficiaries not bitcoin. Silver and gold keep rising whereas bitcoin remains 20 percent off its peaks.
And one can certainly make the case that central bank independence is one of the most dangerous faultlines of the crisis of neoliberalism. Last year I found Dominik A. Leusder’s piece in Jacobin interesting on this score, in which (shifting metaphors) he compares Powell to Thomas à Becket:
Becket initially served as Lord Chancellor, the King’s right-hand man, equivalent to a vizier in the Ottoman Empire or a majordomo in the Merovingian dynasty, and analogous to an ideal version of the relationship between central banks and elected governments. Tiring of opposition from the church and faced with challenging financial circumstances, Henry made his pal Becket Archbishop of Canterbury. But in his new, powerful position, lacking the King’s cooperation when it came to opposing the other powerful feudal lords within the court, Archbishop Becket’s duties ended up at cross purposes with the interests of his king. In 1170 AD, he lay slain on the floor of his cathedral. In the struggle between clerical and secular power, the latter has always come to prevail. And while it is true that as a market actor you should “never bet against the Fed,” when it comes to the Fed squaring up against the executive: don’t bet against the state.
For an interesting fiscal-side analysis I found this tweet by Luke Gromen persuasive.
It is one thing to talk about Fed independence when interest burdens are moderate. When the interest burden begins to significantly shape the fiscal balance, things necessarily get trickier, because an “independent” decision by the Fed to raise rates has a huge impact on the entire budget. Monetary policy de facto becomes fiscal policy and central bank independence is put under strain from another side. This takes us all the way back to the 1940s and the fraught relations between the US Treasury and the Fed during and after World War II.
But the risk - as always with the Trump administration - is of underestimating the sheer force of political radicalism and violence they have unleashed. Is this about political economy at all? Or is this about culture wars and the campaign against the liberal deep state?
I was put in mind of the remarkable piece on Russell Vought by Andy Kroll at ProPublica Vought is thought to be one of Powell’s most inveterate foes in the administration:
Vought is a stated opponent of the status quo. One of the few prominent conservatives to embrace the label of “Christian nationalist,” he once told an audience that “the phrasing is too accurate to run away from the term. … I’m a Christian. I am a nationalist. We were meant to be a Christian nation.” American democracy, he has said, has been hijacked by rogue judges who make law from the bench and by a permanent class of government bureaucrats who want to advance “woke” policies designed to divide Americans and silence political opponents. “The stark reality in America is that we are in the late stages of a complete Marxist takeover of the country, in which our adversaries already hold the weapons of the government apparatus,” Vought said in 2024, during a conference hosted by the Center for Renewing America, a nonprofit think tank that he also founded. “And they have aimed it at us.” The central struggle of our time, he says, pits the defenders of this “post-constitutional” order — what he calls the “cartel” or the “regime,” which in his telling includes Democrats and Republicans — against a group of “radical constitutionalists” fighting to destroy the deep state and return power to the presidency and, ultimately, the people. Vought counts himself as a member of the latter group, which, in his view, also includes right-wing stalwarts such as the political strategist Steve Bannon and Stephen Miller, the architect of Trump’s mass-deportation campaign. “We want the bureaucrats to be traumatically affected,” he said in a private speech in 2023. “When they wake up in the morning, we want them to not want to go to work, because they are increasingly viewed as the villains.” The ultimate radical constitutionalist, Vought says, is Donald Trump. In Vought’s view, Trump, the subject of four indictments during his time out of office, is a singular figure in the history of the American republic, a once persecuted leader who returns to power to defeat the deep state. “We have in Donald Trump a man who is so uniquely positioned to serve this role, a man whose own interests perfectly align with the interests of the country,” Vought said in his 2024 speech. “He has seen what it has done to him, and he has seen what they are trying to do to the country. That is nothing more than a gift of God.” As Bannon put it, sitting onstage with Vought at a closed-door conference in 2023, Trump is “a very imperfect instrument, right? But he’s an instrument of the Lord.”
Following the Bloomberg coverage it would seem that those who pulled the trigger on Friday may include Trump cronies like Bill Pulte at the FHFA, or the DOJ. US Attorney for DC Jeanine Pirro who signed off on the investigation into Powell and Attorney General Pam Bondi has directed US attorneys offices to look into cases of potential taxpayer abuse.
So the underlying thread here may have less to do with deeper points of political economy than with authoritarian and bullying strain that runs through the Trump entourage and their desire to clear away resistance of any kind. Better to think of this moment alongside the endless videos of abusive actions by ICE and the fascitoid tweets out of Homeland Security rather than narratives about Volcker and 2008.
To that extent, what this represents is not just a specific struggle over the Fed as a central institution of political economy but a broader disintegration of elite coherence in the US around the constitutional settlement, as was, and conventional understandings of the rule of law. One thing that the MAGA zealots know for sure is that the Fed, though it commands some authority with independents, is NOT respected as by their own base. Die-hard MAGA folk are long convinced that the Fed is another bastion of establishment liberalism hostile to Trump and all he stands for.
And the truly eye-opening thing so far, is that even as war over the Fed broke out in Washington, up in New York, the US Treasury market barely flickered. The “debasement traders” in precious metals are seeing all their priors confirmed. But the truly big money that operates in the world of sovereign debt and fiat money, just don’t seem to care.
At least at the time of writing early on Monday morning, there is no sign of panic.
Dario Perkins is surely right, as he often is: the Treasury market will really worry about the Fed when there are tough macroeconomic choices to make. And right now that is not the case. Though the Trump administration wants more rate cuts, the Fed is not exactly in a hawkish stance. Even from the Trumpian point of view. Powell is dragging his feet rather than actually defying the President. The clash would only become acute if inflation in the US were rising. Then the Fed would feel obligated to respond by raising rates that would really set the cat amongst the pigeons and unleash Trump’s fury. Until that time, so the story goes as of 730 am on Monday, this is a storm in a teacup. Or rather it is a story like those about ICE, not a matter for the markets to really worry about.
But, if this is true, if it is true that all the markets care about are technical points of macroeconomics, that they will ignore a transparent effort to legally coerce the Fed chair, then this underlines the point about the loss of political coherence within the US elite. Institutions don’t matter. All that matters are the flows of money and power. As far as POLITICAL economy goes, it is a moment of sheer nihilism.
This is a developing story. The market may wake up. It will be interesting to watch the more mainstream Republicans in Congress react. So far the loudest and most significant protests have come from establishment figures on the Republican side:
“Senator Thom Tillis, a key Republican on the Banking Committee who isn’t running for reelection, vowed to oppose any Trump nominees to the Fed until the matter is resolved. “If there were any remaining doubt whether advisers within the Trump Administration are actively pushing to end the independence of the Federal Reserve, there should now be none,” Tillis said in a statement. “It is now the independence and credibility of the Department of Justice that are in question.” “I will oppose the confirmation of any nominee for the Fed — including the upcoming Fed Chair vacancy — until this legal matter is fully resolved,” said Tillis, who also sits on the Judiciary Committee, which has oversight over the Justice Department.
But the significant line here is that Tillis is not running for reelection.
I love writing the newsletter. Can’t wait to get back to even more active posting in 2026 when the book is done. In the mean time, if you fancy buying me a coffee once a month, you know what to do. Chartbook will keep on coming in any case.
Well done. American business elites, whatever their private views of Trump, have taken no unified stance on his threats to the Constitutional order, just as they had no unified public message on climate threats. And based on the current trends in distribution of income, and the performance of financial markets since 2009 - why should they take a stand on "civilian" principles? Not so different than the stance of the German business leaders during the later days of the Weimar Republic.
Really like your point about nihilism and elite priorities. I‘m so tired of people pretending elites are cowed or afraid.