President Trump has an awesome ability to keep even his closest allies perplexed by nonstop announcements that often break precedent, accepted norms, and even the law. Just as opponents begin to rally against one initiative, the White House launches another, sending dissenters off in a different direction, leaving the actions they initially targeted unchanged or even forgotten. Still, several policy themes are coming through loud and clear through all these different actions that have far-reaching financial-market cumulative impact. One is the sheer volatility all this chaos creates; another to which I turn here is the President’s sure and certain effort to make the Federal Reserve a tool of the executive branch, going beyond setting interest rates to turn it into America’s sovereign wealth fund.
As we noted, The President’s executive-order barrage includes one demanding a U.S. sovereign wealth fund (SWF). The tricky bit here is not the lines that would quickly blur between public and private enterprise, an historic U.S. economic principle that won’t slow Mr. Trump down for a minute. Instead, it’s where the money funding the SWF comes from given the lack of a nationalized commodities enterprise such as Norway’s and the Administration’s hell-bent campaign to reduce the federal deficit. Solution? The Fed.
U.S. law is seemingly an obstacle to deploying the Fed as an SWF since it allows the Fed to hold only direct obligations of the U.S. Treasury and its agencies as well as – a Fed sleight of hand in the 2008 crisis – Fannie and Freddie obligations the Fed decided have as much of a direct guarantee as the law demands. Notably, the U.S. requirement that the central bank stays mostly virginal when it comes to other obligations that meet national objectives is the global exception, not the norm. Many central banks – see, for example, the Bank of Japan and ECB – can and do hold green bonds and even equities. Thus, there has long been speculation led most recently by former Fed Chair Bernanke about turning the Fed into an off-budget force for national economic policy, with some also arguing this could be done under current law.
Even if it can’t, that won’t slow this Administration. So, how might the Fed, like it or not – and it will be not – open its enormous coffers to the assets Mr. Trump thinks will do his bidding? There are actually several options.
First is monetizing key assets as Treasury Secretary Bessent plans and DOGE is beginning to do with GSA-owned federal property. One way to raise a very serious amount of money and also achieve a White House objective is, as we detailed, quickly to privatize the GSEs at a gain to Treasury and then put the legacy entities into receivership, selling off billions in IP, software, and even current assets. This isn’t easy, but it’s far from impossible and, even if the GSEs don’t float the SWFs boat, GSA properties and other federal assets will still reap a tidy sum even if government services are torched along the way.
With these funds in hand, Treasury could then deposit them at the Fed, instructing the central bank to invest them in designated obligations. If the Fed balks, Treasury could use its authority under the Exchange Stabilization Fund or other powers to make these SWF obligations also direct obligations of the federal government and thus expressly eligible. If the Treasury first monetizes assets for a revenue gain and then deposits them at the Fed for SWF investment, awkward budget costs related to a federal guarantee would disappear. Monetary-policy transmission might as well be given a whole new quantitative-easing construct, but that will keep only the Fed up at night, not the White House.
Could the SWF also subsidize the “golden age” of cryptoassets the White House desires? This is even harder to do than buying “brown” assets or other investments. But, where there’s a Presidential will, there’s increasingly a way even if no one ever thought it possible.
For example, the Administration might read Treasury’s major role governing the issuance of Federal Reserve notes – i.e., fiat currency – as giving it the power to demand that the Fed issue digital assets, not just physical cash and “central bank” or bank money.” In addition to dollar bills, these forms of digital money constitute the dollars in circulation and thus the fundamental fiat currency of the United States. If the White House wants one or another form of cryptoassets also to count as money, it might cause the Fed to create a new form of digital Federal Reserve note.
This is in fact a central bank digital currency and thus a construct the President strongly opposed. But, call it something different and Mr. Trump and Congressional Republicans might well like it a lot better. Neither has yet to show itself as a stickler for semantic precision.
All of these SWF options are fundamental challenges to private-sector financial intermediation, further eroding the value of a bank charter and creating only targeted opportunities for favored NBFIs. That will bother the Fed more than a little, but even a big bother at the Fed might not matter all that much. If Mr. Trump continues to ride roughshod over institutional norms and Congressional qualms, a central-bank SWF could be heading your way.