Deepening policy divisions within the U.S. Federal Reserve are significantly delaying the Trump administration's push for deregulation. The latest manifestation of this stalemate is the substantial resistance the Fed recently encountered while considering a key waiver application from Morgan Stanley, highlighting the unprecedented decision-making challenges facing regulators ahead of the central bank's leadership transition.
Opposition led by Fed Vice Chair for Supervision Michael Barr successfully postponed Morgan Stanley's planned restructuring of its organizational framework. Although a majority bloc led by Fed Chair Jerome Powell ultimately approved the waiver, permitting Morgan Stanley to acquire its European affiliate, four Board members, including Vice Chair Barr, voted against the measure during the March 26 decision.
In an official statement, Barr issued a stern critique of the Board's decision, arguing that the waiver sets a "dangerous precedent" by potentially allowing large Wall Street banks to use low-cost federal deposit insurance to fund high-risk non-banking activities abroad. He warned that this could bring over $1.5 trillion in foreign non-banking activities under the federal safety net, significantly increasing associated risks and thereby threatening the stability of the entire financial system.
Previously, Fed Vice Chair for Supervision Michelle Bowman had advanced a series of deregulatory policies, dubbed by some as the "Bowman Doctrine," which included substantial cuts to supervisory staff. These moves have drawn strong opposition from progressive Democrats. Recent developments, including the Justice Department closing its investigation into Chair Powell, debates over the confirmation of a potential successor like Kevin Warsh, and ongoing tensions between the Fed and the Treasury regarding bank capital reforms, all indicate that internal Fed divisions have superseded monetary policy itself as the primary source of uncertainty influencing financial markets heading into 2026.
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