Why Trump’s new attack on Powell should be so troubling to investors
Is President Donald Trump on the verge of firing Federal Reserve Chair Jerome Powell? It is a provocative question, to be sure, especially since the Supreme Court recently ruled that the Fed could not be included among the federal agencies whose employees and/or leaders that the president could fire at will. However, in recent days, Office of Management and Budget Chair Russell Vought, among other government officials, has accused Powell of mismanaging the renovation of the Marriner Eccles building, which is essentially Fed headquarters. Vought alleged that cost overruns have brought the price tag of modernizing the aging building to the current dollar equivalent of constructing the Palace of Versailles, something which Powell has strongly denied. Given that this criticism is emanating from the White House, it suggests to some that the administration is floating a legal trial balloon as a predicate for removing Powell from office, no matter how flimsy the argument may be. A Fed chair can only be fired for cause according to federal statute, which includes, according to the legal precedent governing the central bank, “inefficiency, neglect of duty, or malfeasance in office.” (Humphrey’s Executor v. United States, 1935) Trump has publicly berated the Fed chair as “too late,” called him “a very stupid person,” and “dumb.” Trump has yet, himself, to make a case that there is sufficient cause to fire Powell. But given the recent deeply personal ad hominem attacks directed at the Fed chair, could such an accusation be far behind? Unprecedented criticism As it is, the personal attacks are something we’ve never heard from a sitting president, although some have seethed privately about whomever was sitting atop the Fed during their administrations. The most recent accusations from the likes of Vought are, however, a change of tact — challenging Powell’s stewardship and performance running the Fed, as opposed to criticizing him for not lowering interest rates, as the president repeatedly has done for months now. Trump has insisted that the short-term interest rate set by the Fed, the federal funds rate, should be somewhere around 1%, or more than 3 full percentage points below where it sits today, despite Powell’s concerns that the imposition of broad tariffs could reignite inflation. The president further argues that lower rates will make financing the ever-increasing federal debt cheaper, a factor which does not play into the Fed’s statutory dual mandate of ensuring maximum sustainable employment and stable prices. Indeed, lowering financing costs for fiscal deficits only encourages more government spending and, at least according to some mainstream economists, could fuel further inflation. Where interest rates should be today, and when they should be reduced, is already a topic of debate inside the Fed, a decision, it should be noted, that cannot be made unilaterally by the chair. Powell’s leadership and professionalism does not appear to be a concern within the halls of the central bank. Certainly, none of his colleagues, present or past, have made the case that he is incompetent. If, indeed, this administration and its congressional supporters are preparing a case against Powell, the damage done to the Fed’s independence will, in my opinion, be long-lasting, if not irreversible. Risks of politicizing the Fed That would be especially true if the next Fed chair were to immediately follow the president’s dictate to cut rates. The politicization of the Fed would be complete, and the credibility of the Fed would be destroyed, while the risk to the reserve status of the dollar and the safety and soundness of U.S. Treasury bonds would immediately be suspect. A flight from U.S. assets could be the result of such a move. The Wall Street Journal on Wednesday evening reported that Kevin Hassett, the director of the National Economic Council, has become a leading contender to take over the Fed, be it now, or when Powell’s natural term ends next May. Hassett, who in 2020 created a spreadsheet suggesting that Covid would disappear in a matter of two months, has had both his economic credentials and, no doubt, his epidemiological credentials, called into question by some noteworthy economists. If I were a foreign investor witnessing the ouster of a Fed chair, replaced by a presidential supplicant , I’d sell the dollar and U.S. bonds and head for the hills. Let’s hope it doesn’t come to that. The 1970s were not a lot of fun unless you were a fan of stagflation and, of course, disco.
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