Dollar in danger as Trump creates new crisis

 

Gordon L. Weil

President Trump has been warned that his economic policies, including his high tariffs, will drive up costs, possibly leading to inflation.  He wants lower interest rates to reduce inflation and to lower the cost of paying off the immense federal debt that he and the GOP Congress have created.

The Federal Reserve, the agency that has the greatest influence on interest rates, has remained beyond his grasp.  But he aims to get the Fed.

The Supreme Court, usually supportive of his expansionist schemes, affirmed that he could remove members of regulatory agencies, but the Court exempted the Fed.   "The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States," it ruled. 

Failing to harass Fed Chair Jerome Powell to quit, thus allowing him to appoint a rate-cutting replacement, Trump came up with a new ploy.  The president can remove a Fed Board governor “for cause,” leading Trump to hunt for a cause to be used against Powell.

The renovation of the Fed’s headquarters, running over budget, looked like a good target.  But Trump found there were good reasons for the cost run-up and no taxpayer money is involved.  Trump could find nothing to use against Powell.

Firing a person “for cause” means more than firing a person “at will.”  Legal experts may regard cause as requiring some failure in the performance of official duties, but some other issues, like a criminal conviction, might also qualify.  Courts have not ruled on the question.

Certain government officials, fired “for cause,” are likely entitled to due process of law.   If they have been confirmed by the Senate to their positions, they are considered to have a property right to their office.   They are expected to be given a formal opportunity to answer charges and have a third party judge their validity before they must leave office.

Trump has come to know that Powell is one vote among seven Fed governors and could not alone change interest rates.  He has set out to find a four-person majority.   He may fill one existing vacancy.  He counts on his two appointees to the Fed to rubber-stamp his rate cutting, though he may be overly optimistic in his hopes, based on their performance until now.

If he figures correctly, he needs another vacancy.   Bill Pulte, his top housing regulator, seeks ways to help him dump independent officials.  He claims that Lisa Cook, a Fed Board governor, cheated on at least one mortgage application. He has referred the matter to the Justice Department, which would decide if she should be charged.

Trump did not wait.  Pulte’s mere referral, by itself, is enough for him to find “sufficient cause” to remove Cook.  Cook was not given any kind of due process in which she could deny or explain.  And, in the absence of a judicial definition of “cause,” it’s unclear if such a minor, nonofficial matter rises to the level of justifying her removal.

But Trump made clear his focus is interest rates.  His removal letter states: “The Federal Reserve has tremendous responsibility for setting interest rates….  Cook’s alleged action “calls into question your competence and trustworthiness as a financial regulator.”   Trump might also believe that Cook, a Black woman, was an unqualified DEI appointee.

The Fed doesn’t set rates.  The Federal Open Market Committee, composed of the seven Fed governors and the presidents of five of the eleven regional Federal Reserve Banks, decides.  The bank heads are elected by regional banks, not by the president.  Each is independent, not subject to the president.

The firing will now face outside scrutiny.  She is suing Trump, a case that will almost certainly get to the Supreme Court, probably first over an injunction suspending his action.  The Court could give Trump an outright win if it denied an injunction, define “cause,” or tell the president he has gone too far.   This could take time.

Trump has erred in this move against Cook in ways that extend beyond the unproven charge.  The harm to the Fed, the U.S. and the world economic system could be considerable.

 

Here are my views on Trump’s moves against the Fed.

He has abused his power in trying to get the low interest rate he seeks by attacking Fed governors.

He attacks the intended independence of the Federal Reserve and its freedom from partisan considerations, the precise reason for its governors having 14-year terms.

He is undermining confidence in the Fed, endangering its support for a stable economy, which erodes confidence of the financial markets.

By politicizing the Fed’s monetary policy decisions, he has increased the risk of lost confidence in the U.S. dollar, now the world’s reserve currency, virtually as good as gold.

By undermining confidence in the dollar and American debt, he has caused the U.S. to lose influence and even power across the entire world.

Unless the system works quickly and effectively to halt Trump’s move, this damage has already been done.