We’ll see how long Trump’s side of this mutual understanding lasts.

By Wolf Richter for WOLF STREET.

Trump understands – since he ran on that platform and won in part based on it – that Americans hate, hate, hate inflation, that they’re tired of price increases and tired of high prices, and that this is a serious issue, not something to be brushed off by a President, and that they’re blaming Presidents for it, such as Carter and Biden. And he understands that there is one entity whose explicit job it is to fix this: The Fed. And if the Fed doesn’t fix it, that’s where the blame goes.

In an exchange with reporters on Sunday outside at night, with airstairs to a plane in the background, Trump was asked about the Fed’s decision to hold rates, instead of cutting them. He said, “I’m not surprised. I think holding the rates at this point was the right thing to do.”

The Fed has moved rate cuts, if any, into the distance because inflation has been accelerating ever so gently over the past few months, and hasn’t made any progress at all since May, with core services inflation, where most of the inflation has been, not having made any progress in 12 months, stuck just under 4%.

Powell was nominated to by Trump to head the Fed. But in 2018, the Fed’s four little rate hikes that year to ultimately 2.25%-2.5%, plus some gentle QT, attracted Trump’s ire. At the time, core PCE inflation was running at or below the Fed’s 2% target. The hikes were supposed to normalize policy rates and take the wind out of inflationary pressures, while QT was supposed to “normalize” of sorts the balance sheet. Trump keelhauled Powell publicly on a daily basis to push the Fed to end the rate hikes, which the Fed ended them in December 2018 with a final hike, and to end QT, which the Fed let peter out in mid-2019.

This time around, with inflation a real threat, the Fed has already bowed to the Trump administration’s policy priorities that don’t affect monetary policies, in an effort to avoid conflict with the White House and to maintain its monetary policy independence:

The Fed will now “review” the bank stress tests. On December 23, the Fed as banking regulator announced that, “in view of the evolving legal landscape,” it would “soon seek public comment on significant changes to improve the transparency of its bank stress tests and to reduce the volatility of resulting capital buffer requirements.” This was a big complaint from banks.

Fed Vice Chair of banking regulations steps down. On January 6, the Fed announced Fed governor Michael Barr – appointed by Biden as Federal Reserve Board Vice Chair for Supervision, and was targeted by the incoming Trump administration – would step down from that role, making room for Trump to appoint one of the Republicans on the Board of Governors to that top slot of bank regulations.

Withdraws from NGFS. On January 17, the Fed announced that it has withdrawn from the Network of Central Banks and Supervisors for Greening the Financial System that it had joined in December 2020 to please the incoming Biden administration. It said that “the work of the NGFS has increasingly broadened in scope, covering a wider range of issues that are outside of the Board’s statutory mandate.”

Will review bank regulations. On January 31, the Fed (jointly with other bank regulators) announced that it would hold a virtual public meeting in March “as part of their review of [bank] regulations, as required by law,” citing the Economic Growth and Regulatory Paperwork Reduction Act. The law “requires the agencies, with input from the public, to review their regulations at least once every 10 years to identify any outdated or otherwise unnecessary regulatory requirements applicable to their supervised institutions.”

It said that this was “an opportunity for interested stakeholders to present their views on the six categories of [bank] regulations listed in the first two Federal Register notices: applications and reporting; powers and activities; international operations; consumer protection; directors, officers and employees; and money laundering.” So now, it’s suddenly time to review these banking regulations.

Scrubs DEI pages and policies from its website. The Federal Reserve Board of Governors, a government agency, has removed its DEI pages and references to any DEI policies from its website. At the FOMC press conference on January 29, a reporter challenged Powell about Trump’s Executive Orders to scrub DEI out of the federal government.

Powell said, “We are reviewing the orders and associated details as they are made available. As has been our practice over many administrations, we are working to align our policies with the executive orders as appropriate and consistent with applicable law. I want to add that I am not going to have anything more specific for you today on this whole set of issues.”

But the reporter didn’t let up: “I am wondering how you are getting that to be consistent with the Dodd-Frank law’s stipulations about maintaining an Office of Minority and Women Inclusion?” Whereupon Powell said acidly, “I did mention consistent with applicable law, right?”

So the Fed is bowing to the Trump administration on policy issues from bank regulations to DEI, in an effort to keep its monetary policy independent.

And Trump seems to understand the issue of inflation as a real threat; he ran on it, and won on it (among other factors), and now seems poised to let the Fed do its work on inflation, that’s what it looks like. We will see how long Trump’s side of this mutual understanding will last.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.