Fed Fight

Last Tuesday President Trump showed off a draft of a letter firing the chair of Federal Reserve, Jerome H. Powell, during a meeting with roughly a dozen House Republicans, polling them as to whether he should do it and implying that he likely would. 

  

Jerome Powell was appointed to the Federal Reserve (the Fed) by President Donald Trump, not by President Biden as Trump recently claimed. Trump nominated Powell in November 2017 to replace Janet Yellen, and the Senate confirmed his nomination in January 2018. Powell's term as chair was extended by President Biden in 2022.  Trump's clashes with Powell stem from differences in economic policy priorities and personal style, during and between both of Trump's presidencies. 

 

Powell's Nomination By Trump - Getty Images

Trump has repeatedly criticized Powell for not lowering interest rates fast or far enough during his presidency. He believes low interest rates would boost the economy and stock market, helping his administration politically.  

Powell has prioritized long-term economic stability and inflation control. Before the COVID shitshow the Fed raised rates several times from 2017–2019 to avoid overheating the economy, which angered Trump.  Conversely, the Fed significantly eased monetary policy during the pandemic in response to the dire economic uncertainties. 

Evidence of the degree of animus Trump has called for Powell's resignation and referred to him as "clueless" while comparing him mockingly to the leaders of China’s central bank.

Unsurprisingly, Trump has repeatedly broken with precedent by publicly pressuring the Fed - an independent institution - to follow his preferred monetary policies.  Powell has resisted this pressure, defending the Fed's need to make decisions untethered by political meddling.

The bottom line is Trump favors looser monetary policy to stimulate growth; while Powell emphasizes inflation control and Fed independence.  We can argue all day long about who is the brighter bulb; fundamentally, will the president find a means to force the chairman out before his term ends in May of 2026?

 

Time will tell.  

 

Whenever Trump gets to pick a new Fed chair it is far from guaranteed that will lead to lower interest rates.  First, Trump would have to win a messy fight over the legality of removing Powell.  And how would the financial markets react?  Ooh Boy Howdy.  Then there is Senate approval of a nominee.  Finally, a rate change requires a majority of all twelve members of the Federal Open Market Committee (FOMC) to agree.  Presently, only two (both Trump appointees) have publicly hinted that lower interest rates may be justified.  Moreover, regional Federal Reserve Bank Presidents report to their own separate independent regional boards, not the President.   

 

Scenarios that would easily support the president's incessant demands to lower interest rates would be a drop in inflation or a softening of employment levels; or both.  Considering the current economic landscape that is unlikely. 

 

Tuesday we learned that inflation accelerated in June as President Trump’s tariffs started to leave a bigger imprint on the economy, keeping the Federal Reserve on track to hold interest rates steady when policymakers next meet this month.  Most economists still expect inflation to rise over the course of the summer.  And with a barrage of new, so-called reciprocal levies including an eye-popping 50 percent tariff on copper set to take effect on August 1, any hint of tariff-related inflation could portend additional price surges later this year.  The Yale Budget Lab on Monday estimated that consumers face an overall effective tariff rate of 20.6 percent — the highest since 1910.  

 

On the jobs front competition for skilled workers is expected to remain strong.  Analysts project continued resilience for 2025 and greater opportunities in 2026 potentially leading to another wave of job switching.

 

In the unlikely event that the Fed does lower rates that doesn't mean yields on government bonds are guaranteed to fall.  Why, you ask?  Markets, not presidents, set interest rates.    Investor demand drive's the process.  If the markets get a whiff of inflation or political risk interest rates will reflect that.  We've seen this previously in 10-year Treasury yields all the while the Fed was cutting rates.  Rates for mortgages and car loans didn't budge because they're more closely-tied to longer term treasury yields which are influenced by a variety of factors beyond just the Fed's short-term rate decisions.  That is how efficient markets work. 

 

In closing it is useful to know that foreigners own $19 trillion in US equities, $7 trillion in Treasuries and $5 trillion miscellaneous US credit; investors are beginning to realize they might be over-exposed to US assets and their trust is beginning to erode. 

If the president is successful in politicizing our central bank or, as with tariffs, wield it as a cudgel against the central banks of other nations; global investors would view the US with distrust and a less attractive place to invest.  In the absence of the predictability and stability of an independent central bank, they would continue to trim their positions and the dollar's value could come under sustained pressure placing US economic outlook at some degree of peril.

Complicated stuff. 

My guess?  I assign a high probability to President Trump ousting the Fed Chairman.  The near daily theatrics we are witness-to are simply softening-up the beachhead and getting the markets used to the idea.

It is shaping-up to be an interesting summer.  

Of course we've all been to this rodeo before....