The Real Reason Trump is Replacing Everyone at the Fed

A radical reshaping of the Federal Reserve is taking place right now with a complete overhaul of its leadership and who is making decisions about monetary policy. But the big question is why? Why does the Trump administration want new people appointed so badly? I'll give you a hint. It is not just about interest rate cuts. Although that is what has been talked about mainly, I think the real reason has a lot more to do with $3 trillion at the Fed that Trump wants unleashed to buy Treasuries. And I'm going to show you how new leadership in place there could accomplish this goal. Now, most people are aware that ever since Trump got back into office, he's been talking about figuring out ways to get rid of Powell, even looking at the cost of renovating Federal Reserve buildings as a way to justify firing him. Seems like that reasoning did not look sufficient enough to hold up in court, which means he may just need to wait until he appoints Powell's successor. But it's not just Powell that Trump is replacing. Because on August 1st, the Federal Reserve Board announced that Adriana Kugler would step down from her position as a governor of the Federal Reserve Board, effective August 8th. Now, this resignation was given without cause, without reason. But it opens up a spot for Trump to appoint somebody else to take Kugler's place. But things are heating up. Because it looks like Trump is going to get another appointee on the Federal Reserve Board because he just fired somebody else on the board. With this executive order, President Trump referred to his authority under Article 2 of the Constitution and the Federal Reserve Act of 1913 and said, You are hereby removed from your position on the Board of Governors of the Federal Reserve effective immediately. The Federal Reserve Act provides that you may be removed at my discretion for cause. See 12 U.S.C. 242, I have determined that there is sufficient cause to remove you from your position. Now, the cause cited here is that Cook allegedly lied on mortgage applications within the course of a few weeks. A couple of years ago, Cook applied for two mortgages to buy two different houses in two different states. And she stated on both applications that that house would be her main primary residence. Now, I'm not sure whether this is confirmed. I don't know whether she has been charged with a crime yet. At this point, she definitely hasn't been convicted. But what is interesting is that while the president does have authority to fire Federal Reserve Board governors for cause, nothing states what that cause needs to be. Nothing defines what counts as cause or not. Clearly, lying on mortgage applications is not something directly tied to her duties at the Federal Reserve, which is why she has said that he has no authority to fire her. And she stated, I will not resign. Now, this whole thing is super interesting for a couple of reasons. Number one, a couple of weeks ago, we just got a no explanation resignation from Kugler coming out of nowhere. Maybe somebody talked to her behind the scenes and said, hey, look, we want you to resign or else maybe they've been doing digging on everybody at the Fed trying to figure out if there's any way they can push some old people out to put their own people in. And maybe just maybe Cook said no. And so Trump tries to fire her anyway. Now, the second reason that this is interesting is because we don't actually know whether this will hold up in court. There's no definition of what the cause needs to be for the president to remove one of the governors from the board. However, this didn't really have anything to do with her duties at the Federal Reserve. So we don't know which way the court will rule here. And clearly she's not going down without a fight. But this is also interesting for a third reason, because it puts the Federal Reserve itself in a very sticky situation. Because what if the court rules in Trump's favor and says, yep, he actually does have the authority to fire her, but the Federal Reserve allows her to continue her duties this entire time? Well, at that point, then it's possible that Trump could fire Powell for allowing somebody to continue operating at the Federal Reserve, voting, making monetary policy decisions who didn't actually have the authority to be there that whole time. So the Federal Reserve may itself just have to go along with this for fear that they might be held liable in case this goes in favor of Trump. Now, this will be very interesting to see how all this unprecedented stuff plays out. But the question I asked at the beginning of the video is the important one here. Why is this happening? Why is Trump so set on replacing people on the Federal Reserve Board of Governors? Well, if he gets this push through, he's going to have a four to three majority on the Fed's Board of Governors, meaning four of the people on the board will be appointed by him. Now, you might think, well, that means interest rates are going to do whatever Trump wants to do, but not so fast, because the FOMC who sets interest rates is made up of 12 members, not just seven. Those 12 members are made up of the seven members of the Board of Governors of the Federal Reserve and the president of the Federal Reserve Bank of New York and for the remaining 11 Reserve Bank presidents who serve one year terms on a rotating basis. In other words, the committee, the FOMC who decides interest rates is not just made up of the Board of Governors. Those seven people, those seven people, Trump will have a majority appointees on four out of seven. But the other people who vote on interest rates who make up the FOMC are five people who rotate presidents of these banks. And Trump does not pick who those people are. Now, it is true that the Board of Governors have veto power over who the Reserve Bank presidents are. Historically, this has never been used. However, you could make the argument that because they all know that the Board of Governors ultimately could choose who they want to be the presidents, that the people who get to that position to get voted on for Reserve Bank presidents are already going to be people that the Federal Reserve Board of Governors want. I know it's confusing, but basically you've got the Board of Governors that are appointed and confirmed by Congress, and then they have voting power, veto power over who the Reserve Bank regional presidents are. All of them together, those 12 people together make up the FOMC and they vote on things like interest rates. And so having extra people that you want packed on to the Federal Reserve Board of Governors does influence overall monetary policy. But again, this isn't the big reason. The big reason comes down to interest on reserve balances held at the Fed. Right now, there's $3.3 trillion that banks hold at the Federal Reserve. These are bank reserves. And what you can see from this chart is that banks did not keep reserves at the Fed until after the financial crisis. Following the financial crisis, the reserves that banks hold at the Fed have grown to the point where now about $3.3 trillion is sitting there. Now this $3.3 trillion gets paid an interest rate. So banks hold their reserves at the Fed and get paid to do so. Currently, this is the tool the Fed uses to make sure that the federal funds rate, the interest rate that they set, stays within their target range. It makes sure that the federal funds rate never falls below their floor. Because if one bank tries to offer a lower rate to another bank, the other bank will just keep their reserves at the Fed instead. The interest paid on this $3.3 trillion is the floor underneath interest rates. However, it is not necessary for the Federal Reserve to use this in order to make sure the federal funds rate stays within their target range, as is obvious because there were no balances held at the Fed prior to 2008. Prior to 2008, the Federal Reserve used open market operations to increase and decrease reserves in the system by buying and selling treasuries in order to make sure that interest rates stayed where they wanted them to be. Now this is much harder. Now currently, I've talked about this before, but there is a bill proposed in Congress that would prohibit the Federal Reserve from paying earnings on reserves held at the Federal Reserve from this point on. Essentially, this bill would make things go back to the way they were before when the Fed had to manage interest rates through open market operations and they couldn't just set a floor by paying interest on the reserves that banks hold at the Fed. If banks can no longer get free interest from the Federal Reserve by holding their reserves at the Fed, then banks have to do something else with their reserves, buy treasuries. And if the Federal Reserve stopped paying interest on overnight reserve balances, that's exactly what would happen. $3.3 trillion of bank reserves would leave the Fed and would flood into U.S. treasuries, driving prices up and interest rates down. But what does this all have to do with Trump reshaping the leadership at the Fed? Well, this bill requires Congress. It requires rewriting the Federal Reserve Act, or at least making an amendment to it. And that is unlikely. However, if you can appoint people at the Federal Reserve who will make changes that you want them to, maybe you can accomplish this goal without Congress. Especially considering that the Federal Reserve Board of Governors alone controls interest rates other than just the federal funds rate, including the interest paid on reserves that banks keep at the Fed. In other words, Trump stacking the board in his favor might get interest rates overall a little bit lower in his favor. But that's not the big deal here. The big deal is that the Board of Governors alone, without the regional presidents, they decide the interest rate on the reserves that banks hold at the Fed. The amount the Fed pays on this 3.3 trillion dollars. Suddenly, you have a 4 to 3 majority on the Board of Governors and they can decide to decrease the rate paid on those reserve balances to zero or significantly lower. And all of that money rushes out into treasuries instead. It doesn't matter what the federal funds rate is at that point. It doesn't matter that a bill hasn't gone through Congress. You can effectively accomplish the same thing, moving the reserves out of the Fed into treasuries simply by getting a majority on the Board of Governors who agree to do so. And you don't even need the whole entire FOMC, which includes the rotating regional presidents. This is significant because if the Federal Reserve just lowers rates like Trump says he wants, it is not likely to significantly lower rates of things like the 10, 20, and 30 year US Treasury. It will lower rates of T-bills, but that doesn't help the government roll over the 10 trillion dollars of national debt that matures every single year that they're just rolling over into more T-bills because they can't afford to roll it over into the longer term debt. But 3.3 trillion dollars of new demand for treasuries could, at least in the short term, significantly make a dent here. Not to mention the fact that if the Fed stops paying so much interest on reserve balances, then the Fed suddenly becomes profitable again because they've got a large balance sheet and they're not paying out any more on reserves, which means all that income that they're making gets swept back to the Treasury again like it used to. So I think that is the real play here. Obviously, we're going to have to wait and see how this firing of Cook plays out. But within the next couple of months, we could see some major restructuring with who's in charge at the Federal Reserve, major leanings towards rate cuts, and most importantly, a draining of the reserves held at the Fed to push that money back out into treasuries. Now, if you'd like to hear my opinion about what to do about things like this, specifically that I don't talk about on YouTube, I have a free newsletter that you're not signed up for yet. Send it out weekly. All you have to do is click on the link in the description below, sign up, and you'll start receiving it in your inbox. As always, thank you so much for watching. Have a great day.