Trump desires low interest rates, but the Federal Reserve chair candidates he favors advocate for limiting the central bank's core tool for achieving low rates—quantitative easing.

Source: Jin Shi Data

The main competitors for the Federal Reserve chair under President Trump are forming a consensus around a policy that seems contrary to Trump's style.

According to Politico, Trump has continuously criticized current Federal Reserve Chairman Jerome Powell, with the real intention of appointing a new central bank president next year who aligns more closely with his ideology. However, in this succession race, much of the discussion has focused on a topic that appears to contradict Trump's stance: limiting the scale of the Federal Reserve's financial asset holdings.

It is well known that Trump loves low interest rates. He has repeatedly expressed a desire to lower mortgage rates and reduce the federal government's interest expenses on debt. Yet, the current policy momentum leans towards limiting the Federal Reserve's tools to achieve that goal—currently, the Fed holds over $6 trillion in assets, a result of the institution not only lowering short-term rates to zero during various crises but also expanding its balance sheet by purchasing trillions of dollars in government bonds and mortgage-backed securities, thereby lowering the long-term rates that are more critical for home and auto loan borrowers.

Now, Trump's allies are vigorously debating whether the Federal Reserve should reduce its intervention in the next recession. This raises a key question for the president, who is weighing candidates for the central bank chair: does he want to weaken the Fed's influence on the market, or does he want to leverage that influence to achieve his goal of extremely low interest rates?

Treasury Secretary Mnuchin, who is responsible for the selection process and is also viewed by Trump as a candidate, wrote in a lengthy 5,000-word magazine article that the Federal Reserve must commit to "reducing its distorting impact on the market." Republicans have long accused the Federal Reserve of interfering with market discipline by injecting massive amounts of cash into the financial system, and Mnuchin has broadly defined the current relationship between the government and the market as unhealthy.

This viewpoint has resonated with others on the list of Federal Reserve chair candidates. Former Fed governor Kevin Warsh recently declared on Fox Business with populist rhetoric: "We need to pull money out of Wall Street." At last month's roundtable press conference, when asked if he was seeking a Fed chair candidate who supports balance sheet reduction, Mnuchin did not directly respond. He explained that the main point of his article was more forward-looking: aimed at warning against future asset purchases, rather than calling for an immediate contraction of the Fed's size.

"As the effectiveness of antibiotics diminishes, the effects of continuous interventions also gradually weaken," he admitted to me, but acknowledged that reform is indeed a consideration in his selection process. However, according to my observations, the only time Trump has commented on the size of the Federal Reserve's balance sheet was in a cryptic tweet in December 2018, calling for a halt to balance sheet reduction—due to concerns about liquidity in key financing markets.

Some of the main candidates, however, have shown different positions. Warsh has been advocating for limiting the central bank's size for the past fifteen years, arguing that shrinking the Fed's balance sheet would allow it to lower short-term rates without triggering inflation (though not all experts agree with this view). Michelle Bowman, a Fed governor included in Mnuchin's final candidate list, has called for establishing "as small a balance sheet as possible," interpreting this as a way to reserve policy space.

Mnuchin himself has not completely ruled out the possibility of leading the Federal Reserve. Although he previously indicated a reluctance, Trump's latest statement is intriguing: "I am considering him to lead the Fed… but he is unwilling to take over. He is more interested in the Treasury position, so we haven't really included him in our considerations."

One of the reasons for the current situation is that concerns about the expansion of the Federal Reserve's power are indeed driving the actions of Mnuchin, Warsh, and others. The Treasury Secretary's arguments reflect a small government ideology in many ways; he pointed out in an article for International Economics that the Fed's asset purchases (i.e., quantitative easing) created space for Congress's massive post-COVID spending and exacerbated wealth inequality by artificially inflating asset prices.

However, it is hard to believe that the highly capricious Trump would need to reject a Federal Reserve leadership that is fully committed to rescuing during a recession. Yet for Republicans who wish to constrain the Fed's market presence, this may be the best time.

Currently, the Federal Reserve is set to stop balance sheet reduction on December 1, a decision aimed at preventing liquidity bottlenecks in the financial system. The White House's chief economist, Stephen Miran, who is on vacation, supports this decision. He analyzed for me that the market-boosting effect of this move may be limited, as the central bank will simultaneously replace mortgage-backed securities with short-term government bonds—meaning the market will bear the long-term debt risk that the Fed originally held.

Regarding more aggressive intervention measures, Miran stated that he does not oppose quantitative easing when the Fed's dual mandate of achieving full employment and price stability faces "significant, not minor risks." It should be noted that key issues, including how quantitative easing affects market pricing and to what extent it can stimulate a recessionary economy, remain unresolved in academia.

Powell hinted in a speech last month that, in retrospect, the Fed's asset purchases in 2021 may have lasted too long—this was indeed the view of some experts at the time. However, he defended the value of quantitative easing as a key policy tool, especially during the market freeze and soaring unemployment caused by the COVID-19 pandemic in 2020.

The core issue now is how the situation will evolve in the coming months as Chairman Powell's term ends in May next year. Voices advocating a more cautious approach to quantitative easing are gaining greater influence, suggesting that the Federal Reserve's response to future economic downturns may undergo profound changes.

But regardless of who the final candidate is, there is reason to believe that the Federal Reserve officials appointed by Trump will still be forced to use all policy tools during an economic slowdown—especially at a time when the American public is deeply concerned about the cost of living. As the saying goes, in times of crisis, people seek divine intervention. The strong positions of these candidates now may crumble in the face of future crises.

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