Misguided attack on Powell puts dollar in danger

 

Gordon L. Weil

Trump administration agencies often fall in line with the president’s wishes, even without a specific request from him.   He can then claim that he was unaware of their moves.   This is happening now.

Trump doesn’t like Fed chair Jerome Powell.  The president wants low interest rates and believes that, as chair of the Federal Reserve Board of Governors, Powell can lower interest rates.   He can’t.  Besides, the Fed leader believes that rates deal with economic conditions and not politics. Trump wants Powell out as soon as possible.

Facing the November congressional elections, Trump seeks a booming economy, which he believes would result from lower interest rates.  The sooner, the better.  The problem for him is that the Fed has not found sound economic reasons to slash rates.  Lower rates could cause inflation, which would harm average people.

In his arsenal of tools to dislodge Powell, Trump might consider legal action.  But Powell has given him no grounds to go to court and, even if he does, Trump would not necessarily get the lower rates he seeks.

The U.S. Attorney in D.C., a former Trump supporter on Fox, has used a grand jury to issue subpoenas that could lead to a Powell indictment.  The simple opening of a judicial proceeding could give Trump a pretext to try to remove him from the Fed Board “for cause.”

The issue hardly passes the straight-face test.  Powell is being investigated for testifying falsely before Congress about the renewal of the Fed’s headquarters.  Like many other capital projects, it has been subject to cost overruns.   The U.S. Attorney charged that the Fed failed to provide her office with full information when requested.

Powell had testified that the buildings had not been “seriously” renewed for many years.  A GOP committee member pointed to some work done decades ago to charge him with lying.  Beyond that, the Republicans focused on some ornate elements of the original plan, which Powell explained had been dropped as shown on the revised plans sent to Congress.

Despite Powell’s detailed written submissions, the investigation seems to be focused on the deleted improvements.  The U.S. Attorney says it’s her job to make sure that taxpayers’ money is carefully spent.

If the case is pursued, it would extend past the end in May of Powell’s term as chair.  A grand jury might not indict him, given the trivial charges and absence of evidence.   The purpose of the investigation may be less about punishing him than harassment, possibly inducing him to quit.  But he can remain a Fed governor, after his term as chair ends.

Trump and his Justice Department are obviously wrong on Powell.

First, there’s no substance to the charge. The Fed has made building plans available as they are modified, so the U.S. Attorney’s charge about not getting all the documents may assume the existence of unseen documents and be a fishing expedition.  If she has what she wants and Powell did not lie, the investigation should go away.  Harassment accomplished.

Second, no taxpayer money is involved.  The Fed is not funded with tax dollars, but makes money through market operations to support its monetary policy decisions.  Its funding comes from banks across the country.  When the Fed earns more than its costs, it makes payments to the Treasury.  Its only effect for the taxpayers is a net benefit.

Third, Powell as Fed chair does not make interest rates decisions.  They are made by a 12-member committee composed of the seven Fed Board governors and five heads of regional Federal Reserve banks, who are not presidential appointees.  When the committee sets rates, each member votes independently.   Powell seeks broad agreement, but he does not dictate.

Fourth, the impact of rate decisions is mostly limited to the near-term.  The rates, charged by the Fed for funds borrowed by banks, can adjust the money supply several times a year.  The Fed does not set mortgage or credit card rates.  Trump also believes lowering short-term rates will reduce interest on the high federal debt, which is mostly long-term.  Fed actions have little effect.

Beyond putting pressure on Powell to quit, Trump has also tried to fire Lisa Cook, a Fed governor who disagrees with him on rates.  A Trump ally has charged her with cheating on a personal mortgage application.  The mere allegation should not support dismissal “for cause.”   She has taken her case to the Supreme Court and remains on the Board.

The U.S. dollar is regarded as the standard of the world, thanks largely to the Fed maintaining its value based on its independent view of economic conditions, just as Congress intended.  A strong dollar protects the American economy, boosts U.S. economic power and ensures international stability. 

But the dollar is now seriously threatened by Trump’s misguided bid for Fed control.