Trump starts Fed overhaul with small step to the right. The big leap is still to come

Well, it could have been worse.

Given the people that US President Donald Trump had reportedly considered for filling a spot on the Federal Reserve’s board of governors, the appointment of Stephen Miran is sensible.

There had been suggestions that Judy Shelton – who a Republican-controlled Senate failed to confirm on the Fed in Trump’s first term because her views on gold and the central bank were deemed too extreme – could get the post.

Instead, he has tapped Miran, who is the current chair of the president’s Council of Economic Advisers, where he has been cheerleading Trump’s policy agenda since the start of the year.

There is a history of people from the Economic Advisers Council ending up on the Fed. The past three Fed chairs – Janet Yellen, Ben Bernanke and Alan Greenspan – all made the shift.

But Miran is an outlier on a couple of fronts.

Like everyone associated with Trump, he has been critical of the Fed under Jerome Powell. Of course, like everyone associated with Trump, this criticism has ebbed and flowed like the Potomac River.

Last year, he attacked the Fed for lowering interest rates and said it was too willing to accept inflation running near 3 per cent instead of around the bank’s 2 per cent target rate.

This year, he attacked the Fed (like his political master) for not cutting rates even though inflation is at the same level it was in 2024 when he was arguing against looser monetary policy.

Someone in Trump’s orbit who doesn’t shift their position in line with the president’s doesn’t survive long. So, that Miran could vary his opinion about the Fed and its policy settings is not the least surprising.

What is surprising, however, is Miran’s central role in the so-called Mar-a-Lago Accord.

The Accord envisages that America’s enduring trade deficit has little to do with the demand of US consumers for cheap goods from other parts of the world. The deficit is due to an over-valued American dollar.

If major trading partners could be encouraged to increase the value of their currencies relative to the US dollar – as occurred in the mid-1980s when US allies, including Germany, Britain and France, agreed to help out America – then the deficit would evaporate.

At the same time, the US would remain the globe’s reserve currency, which confers huge benefits to American consumers and businesses. In other words, the Accord envisages the world acting against its own interests to help the US.

The world, however, has shifted since 1985 when the US accounted for 34 per cent of global economic activity (it’s now less than 20 per cent), Ronald Reagan was in the White House, and people were listening to Wham!’s Careless Whisper on vinyl.

Germany and France, for instance, now share the euro. American government debt was just $US1.8 trillion (it’s now $US36 trillion and growing).

The currencies of the major trading nations are now largely dictated by investors rather than governments. The European Central Bank, the Bank of England, the Bank of Japan and others would cause huge problems for their economies if they were to intervene in currency markets to achieve Miran’s goals.

And while Americans feared the rise of Japan in 1985, today the concern is China, which on some measures has an economy larger than the US.

Miran, however, argued that if nations refused to hurt their economies as America demanded, the same outcome could be achieved by imposing tariffs.

We’ve seen that. This week, Trump’s new tariff regime was put in place, taking America’s effective tariff rate to its highest since the Great Depression.

According to Miran, a second Trump administration would “take steps to ensure large structural changes to the international tax code occur in ways that are minimally disruptive to markets and the economy”.

The fallout from liberation day, when Trump effectively backtracked on his tariff plans, given a huge sell-off on equity and bond markets, must have come as a surprise to Miran.

What also must be surprising to Miran is the clear slowdown in the US economy over recent months since the tariff announcement. Trump sacked the head of the Bureau of Labor Statistics, Erika McEntarfer, last week because job numbers confirmed the economy was struggling.

It’s unclear who he will sack after data overnight showed the number of people applying for unemployment benefits climbing to its highest level since November 2021.

Miran, if confirmed by the Senate, will most likely only be on the Fed until early next year (he is taking over the remainder of the term of Adriana Kugler, who unexpectedly resigned last week). He won’t have the same troubles as Shelton and other people Trump sought to install on the Fed during his first term.

Unlike the issues created by Trump’s move against McEntarfer, the appointment of Miran is relatively sound.

The bigger issue is who will replace Powell, whose term as chair ends in May (though he can remain on the Fed board until 2028).

Bloomberg News overnight reported that Chris Waller – one of two board members to vote in favour of a rate cut at the Fed’s July meeting – is the frontrunner to replace Powell.

The operating theory out of Washington is that Miran holds his position until the start of the year when Trump names Waller to succeed Powell. Waller then “shadows” Powell until the current chairman gives way to the new one.

By then, if financial markets are correct, the Fed will have cut interest rates in response to an economic slowdown that may be accompanied by a relatively high inflation rate (both aided by Trump’s tariff policy).

With Powell no longer in charge, and Waller (or some other Trump appointee) running the Fed, the central bank’s problems – and those of the president – aren’t going to end anytime soon.

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