More Fed Attacks, More Trump Headaches, or Not

It’s starting to feel like President Trump wants Jerome Powell to hang around. It’s either that or he isn’t reading the tea leaves. Increasing political pressure on Powell and the Fed, especially since it’s very unlikely he can force Powell out, is not going to end the way Trump wants it to. In fact, the Chair has already shown that he is willing to stand his ground — lest we forget the Sunday shot heard around the economic world. And the likely outcome of the Lisa Cook case suggests the Supreme Court is going to say he’s within his rights to do so. What the President wants — and he may come to regret pushing for, but that’s a topic for a different time — is lower rates and a more subservient Fed free of Jerome Powell.

But what if the administration knows that it isn’t possible? What if they know they’d be setting their guy up for failure if he starts in May? This may not be a masterstroke of Sun Tzu-level strategy, but what we see in the headlines and quotes may also be misleading. That’s because it’s undeniably better to have a political punching bag in an election year than a bruised Fed Chair who can’t deliver.

The good news for the Trump Administration is that Kevin Warsh has a Nomination Hearing scheduled before the Senate Banking Committee on April 21st at 10 am Eastern. As a respected former Fed Governor during the Global Financial Crisis and its aftermath, he is likely to meet little resistance from Republicans and only moderate resistance from Democrats. In other words, it’s very likely a done deal that he is the next Chair of the Fed, whenever that hearing actually takes place.

The problem is that Republican Senator Thom Tillis of North Carolina is still vowing to block the nomination until the United States Attorney for the District of Columbia, Jeanine Pirro, relents on the investigation into Jerome Powell and the construction of the Fed’s updated headquarters. In fact, a Nomination Hearing on the same topic, set for tomorrow, was canceled last week, presumably for the same reason. And Tillis isn’t the only Republican balking. Senate Majority Leader John Thune of South Dakota, also a Republican, just hours ago publicly stated that he thinks “it’s in everybody’s best interest to wrap up the investigation. I’ve said that before, it would be better if it winds down.” It’s not an exaggeration to say that this is the most resistance that Republicans have shown to any of Trump’s initiatives in his second term. Tillis likes to spar with Trump, and he’s not running for re-election. He’s a senator until January 3rd, 2027. He has nothing to lose and a lot of time not to lose it.

Ok. So, if Tillis can hold up the nomination process, and all he wants is for Pirro to end her likely politically motivated investigation, is the Administration likely to acquiesce and call off the dogs? If you answered yes, you’re not living in 2026, or you don’t know Trump. I point you to Exhibit A — the unannounced drop in by Pirro’s office to the Fed’s construction site. Exhibit B is the President’s response on Fox News this morning when asked about the probe, “If ​he's not leaving on time - I've held back firing him, I've wanted to fire him, but I hate to be controversial, you know. I want to be uncontroversial, but he will ​be fired.” That doesn’t sound like a President ready to concede that he can’t win the fight.

There is no question that Trump hates Powell. He feels duped into nominating a Fed Chair who wants to assert the institution’s independence, and the President is rightfully concerned about the economy. He wants a Fed Chair who is eager to lower rates by a lot, quickly. Lazy money would be on a TACO move at the last minute to make sure Warsh is in seat by May 16th. But, look a little closer, and you’ll see that perhaps the motivation isn’t as strong as it would appear.

Let’s assume that Warsh is, in fact, as zealous as Trump wants him to be about cutting rates. In that world, he walks into the FOMC in mid-May, calls a lunch meeting with his fellow Governors to twist some arms, takes a train up to NYC to shout at John Williams, the New York Fed President, and spends his train ride back calling the other 11 Regional Fed Presidents to convince them that this is not the inflation they are looking for. Even if the FOMC is riddled with groupthink, which it isn’t, that’s a lot of people who are increasingly nervous about inflation, who need to do an about-face. Don’t confuse the Fed’s culture of consensus with one of obedience, especially an FOMC that feels like it’s been under attack for over a year. Not happening.

What about data? Can he effectively use that to argue for a rate cut right now? Two letters, one syllable: no.

Each voting member of the FOMC is independent. Yes, the Board can and does make requests to regional banks behind the scenes, but it’s never about monetary policy decisions. That’s an open debate and the last two years of regular dissents and public commentary should make that obvious.

So, if he can’t use the data to convince his colleagues, and he can’t come in guns blazing, can he really lower rates in the near-term? Same two-letter word: no. And it’s very likely that many in the Administration know this. Just yesterday, Treasury Secretary Bessent said that while he thinks they should eventually lower rates, he understands “if they want to wait for some clarity,…”

Everyone knows more inflation is coming. The Iran War guarantees that. And as we’ve discussed in previous posts, the economy had an inflation problem before the Iran War kicked off. Warsh’s arrival now would almost certainly put him in a no-win situation. Stuck between a hardened FOMC worried about inflation and a President who can’t help but attack Fed officials for not lowering rates. A true central banker, Kobayashi Maru. And Warsh isn’t Captain Kirk. He can’t just rewrite the program.

We’re not the first to say this, but keeping Warsh away from the Fed at this moment has benefits for both Warsh and the President. For Warsh, he doesn’t start his second tour at the Fed off as the most weakened Chair in modern history. For the administration, they don’t have to throw the preferred Republican choice for Fed Chair into the political woodchipper on day one, and it affords the President something he loves: a punching bag, in an election year.

Let’s say that the economy starts to falter going into the midterms. The president can conveniently blame Powell and the Fed for not lowering rates. We’re not saying that would work. But that has a better chance than installing your own guy, only to find yourself blaming him five and a half months later if the economy turns. Again, we’re not arguing that Trump is playing 4D chess; it’s obvious he lacks self-control and that many of his policies are, at best, contradictory. However, he and some in his administration likely see the writing on the wall and recognize that patience may be beneficial. And in the meantime, he can keep hounding and threatening Powell with little repercussion, and the Justice Department can continue to make surprise visits to the construction site, knowing they’ll be repeatedly turned away.

This is the de facto short-term equilibrium. Expect it to persist past Powell’s “last day” as Chair on May 15th, with a chance for it to continue right through the summer and into the midterms. There’s little to lose and much to gain.