- Elon Musk signaled support for eroding the independence of the Federal Reserve, setting off alarm bells for some investors.
- There's little appetite on Wall Street for undermining the central bank or ousting Jerome Powell.
- Industry experts told BI that markets regulate Trump's actions with the Fed, despite Musk's influence.
The federal official tasked with bringing down inflation is in the crosshairs of the world's richest man — and Wall Street isn't happy.
On Friday, billionaire Elon Musk endorsed a suggestion to let the president control the Federal Reserve, which is run by Chair 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 the 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 that once seemed remote, DealBook reported.
"He seems to be someone who has the ear of the president," Mark Spindel, an investment manager who co-wrote 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 value the bank's independence.
In a recent comment about the Fed on October 15, Trump acknowledged that "there was a question" over whether he could fire Powell, but also 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 any words: "No." He said that presidents are "not permitted under the law" to demote the head of the central bank. Powell's term ends in May of 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 of that year, Trump took a verbal axe to 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 continued to press the issue into 2019, firing off a string of tweets in February 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 U.S. 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 if he followed through, the Journal reported.
Trump continued his vendetta on the campaign trail this year. 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, per the Journal. Peter Orszag, a former Obama administration official and CEO of financial advisory firm Lazard, told 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. Gallup found that 61% of Americans reported that they own stock as of May 2023, an uptick from past years.
Both Siegel and Spindel anticipate 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 is doing what Trump wants: cutting rates. There's room for policy disagreements down the line, but both said that the president-elect is less likely to go after the central bank at the very moment 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 department. Though Siegel doubts that Trump will actually undermine the central bank anytime soon, 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.