The fight over Jerome Powell puts Elon Musk at odds with Wall Street
The federal official tasked with bringing down inflation is being targeted by the world's richest man — and Wall Street isn't happy.
On Friday, the billionaire Elon Musk endorsed a suggestion to let the president control the Federal Reserve, which is run by Jerome Powell. The Fed's mandate is to maintain the stability of the US economy, and giving the commander in chief control over it would erode the Fed's independence from politics.
The president-elect's allies have been crafting a playbook for how he could restructure the Fed and kick Powell out before his term ends, The Wall Street Journal reported. With Musk backing the idea, some Wall Streeters are on edge about the possibility, which once seemed remote, DealBook said.
"He seems to be someone who has the ear of the president," Mark Spindel, an investment manager who cowrote a history of Fed independence, told Business Insider of Musk's influence. "But if anything, taking a more CinemaScope view, I think trying to assign typically normative behavior to this Trump administration is going to be difficult."
Many Wall Streeters are concerned that undermining Fed independence would undercut investors' faith in the stock and bond markets. While Trump has made comments about influencing or ousting Powell before, it would be more disruptive this time around as the central bank is in the delicate position of continuing to bring down inflation while maintaining the strength of the labor market.
"In general, there's no question that the market does not like any attempt to interfere, by the executive or congressional branches, in the independence of the Fed," Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, told BI. He said that "virtually every economist" and most members of Congress valued the bank's independence.
In a comment about the Fed on October 15, Trump acknowledged that "there was a question" over whether he could fire Powell but said, referring to interest rates, "I have a right to say I think you should go up or down a little bit."
Trump has a history of criticizing Powell
When reporters asked Powell last week whether he'd resign if Trump asked, the chair didn't mince words: "No." He said presidents were "not permitted under the law" to demote the head of the central bank. Powell's term ends in May 2026.
Trump's interest in Powell and the Fed seems to boil down to a desire to have a say in interest rates. His criticisms began when the Fed raised rates in 2018. In October that year, Trump slammed the central bank amid a stock-market tumble, calling it "crazy" and "out of control."
At the time, Trump was toying with the notion of firing Powell, despite significant legal questions about whether he could do so. Markets evidently hated the idea. Stocks had a terrible day, one of the worst of Trump's presidency before the pandemic.
Trump kept pressing the issue into 2019, posting several tweets in February that year urging the "boneheads" at the Fed to bring "interest rates down to ZERO, or less." Central banks in Europe and Japan have brought interest rates below zero when their economies were particularly weak, but Trump made the call when the US economy was strong. His aim was to weaken the US dollar, which is good for domestic exporters.
The Fed did not heed his advice. In 2018, Fed leaders started preparing a legal strategy against Trump for if he followed through with an effort to ax Powell, the Journal reported.
On the campaign trail this year, Trump maintained his stance. He said in February that he wouldn't reappoint Powell as Fed chair, before telling Bloomberg in July that he would allow the chair to finish his term, "especially if I thought he was doing the right thing." At a press conference on August 8, Trump suggested that presidents should have sway over interest rates.
"In my case, I made a lot of money," he said at the time. "I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman."
Wall Street fears undermining the Fed would disrupt investors and create a political backlash
Advisors close to Trump with market experience have cautioned against replacing Powell. Scott Bessent, one of the top contenders for Treasury secretary, recently walked back a suggestion to nominate a "shadow" Fed chair, the Journal said. Peter Orszag, a former Obama-administration official and the CEO of the financial-advisory firm Lazard, told CNBC's "Squawk Box" that any attempt to weaken the Fed "could be destabilizing."
Wharton's Siegel said that given how many Americans own stocks, either directly or indirectly through retirement plans or other investments, the market disruption would have a broad impact and risk political backlash. In Gallup polling of Americans from April 2023, 61% of respondents reported that they owned stocks, an uptick from past years.
Both Siegel and Spindel expect that the markets themselves will serve as the ultimate guardrail against Musk's influence or any attempt to oust Powell and undermine the Fed. Trump is, Siegel said, extremely attuned to the stock market and uses it as a barometer of his success.
"Trump values the stock market and how well it does," he told BI. "And the stock market values the independence of the Fed. So if he wants the stock market to continue to go up, he will not interfere with the independence of the Fed."
The Fed's interest-rate cuts may insulate it from Trump's scrutiny
As of right now, Siegel and Spindel said that the Fed was doing what Trump wants: cutting rates. There's room for policy disagreements down the line, but both said that Trump was less likely to go after the central bank as it's working in his favor.
Spindel compared the markets to a "governor," the tool engineers use to slow down a train. He said it might be the only guardrail, considering Musk's influence, a more MAGA-aligned Republican Congress, and the Supreme Court's expansion of the president's executive authority.
Overall, Musk's newfound government influence is raising some alarm bells. The tech billionaire attempted to influence Senate leadership, hopped on the phone with Ukrainian President Volodymyr Zelenskyy, and scored a leadership role in a new advisory group. Though Siegel doubts that Trump will undermine the central bank anytime soon, he said he was disappointed to see Musk weighing in on macroeconomic policies he doesn't typically discuss.
"It's outside the realm that I think Trump wanted him to exercise, which had to do with the efficiency of government operations," Siegel said. Still, he's confident that the markets hold more sway than Musk, at least for now.