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Trump challenges the Fed

President Trump has signed an executive order creating a United Sovereign Wealth Fund and Strategic Cryptocurrency Reserve. Sovereign Wealth Funds have been created in countries with surplus revenue, such as the oil-exporting Gulf states. The federal government is projected to incur deficits and accumulate debt for the foreseeable future. President Trump states that the Sovereign Wealth Fund will not be financed with debt or increased taxes, so the question is how will the Fund be financed? There are several scenarios, all of which pose problems for the Federal Reserve


One source of funding is the sale and leasing of mineral assets on public lands. The value of mineral resources on public lands exceeds the $36 trillion in debt held by the public. The optimum policy, of course, would be to use that revenue to pay down the public debt and reduce debt to a sustainable level. That policy could have zero impact on the money supply. The decrease in the money supply from private purchases of minerals on the public lands could be offset by Fed purchases of bonds held by the public. Paying down the public debt would give the federal government more fiscal space and give the Fed more freedom to pursue an independent monetary policy.


But President Trump proposes to use revenue to purchase bitcoin and other assets for the Sovereign Wealth Fund. This of course will do nothing to address the unsustainable growth in federal debt. Using revenue to purchase bitcoin will also pose a challenge for the Fed. Using revenue to purchase bitcoin could increase the money supply, triggering higher rates of inflation. The Fed could offset the changes in the money supply through open market operations, but the Fed would clearly be more constrained in pursuing an independent monetary policy.


The most damaging option is one that has a historical precedent, a revaluation of the gold reserves held by the Treasury. During the Nixon Administration those gold reserves were revalued from $35 per ounce to $42 per ounce. The revaluation of gold was used in part to finance expansionary fiscal and monetary policies. The outcome was stagflation, with double-digit inflation rates and high rates of unemployment.


Given the lofty current price of gold, it would be very easy to revalue the gold reserves held by the Treasury, and for the Treasury to use that increased value to purchase bitcoin for the Fund. The result could be an expansion of the money supply and higher rates of inflation. The Fed could use open market operations to offset the increase in the money supply; but there would be tremendous pressure for the Fed to pursue accommodative monetary policies.


President Trump pressured the Fed to pursue accommodative monetary policies during his first administration, and we should expect him to do so during the current administration. Over the last decade the Fed held interest rates close to zero for many years. Accommodative monetary policies have triggered the most recent bout of inflation, and the Fed has failed to reduce inflation to its  target level. If the Fed is pressured into pursuing accommodative monetary policies, as it has been in the past, citizens will pay the price in a higher cost of living.



The Fed is charged with pursuing independent monetary policies consistent with price stability and full employment. To do so the Fed must be immune from pressure by the Executive Branch. Perhaps the major challenge facing the Fed during the current Trump Administration will be to retain its independence. Trump’s creation of a Sovereign Wealth Fund and Strategic Cryptocurrency Reserve could undermine that independence. His threat to appoint a new Fed Chairman before Jerome Powell’s tenure is up, suggests that there are rough days ahead for an independent Fed.


Barry W. Poulson is professor emeritus at the University of Colorado, Boulder Colorado, and on the Board of the Prosperity for US Foundation


William Owens is a former vice chairman of the Joint Chiefs of Staff. He is on the Board of the Prosperity for US Foundation


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