Trump's choices: Ukraine, Fed mistakes

 

Gordon L. Weil

Making policy is a matter of making tough choices.  As two current cases show, there’s a lot of room for error.

Ukraine vs. Russia

Almost four years ago, Russia invaded neighboring Ukraine, seeking to gain territory and install a puppet regime there.  To the world’s surprise, Ukraine halted the Russians and regained much lost territory.

Under the Soviet Union, Ukraine was under Moscow’s total control.  Historically, the Russians had treated Ukrainians as second-rate subjects.  Even after the collapse of the Soviet Union, Russia broke successive agreements to respect Ukraine’s independence.

Under President Biden, the U.S. opposed the invasion and supported the Ukraine government.  Relying heavily on that support, Ukraine pushed Russian forces back. What Russia’s Putin had planned as a rapid and complete victory turned into a protracted war.

European nations, alarmed by the Russian land invasion, which they fear as a potential threat to themselves, also support Ukraine.  Like much of the world, they recognize Russian aggression as a breach of the rules-based world order that followed World War II.  But they lack the military resources and intelligence capability that the U.S. deployed. 

As president, Trump revealed a different view.  He ignored the historical relations between Russia and Ukraine and Russia’s repeated violation of its non-aggression agreements.  He saw the conflict as a matter of territory and causing an unnecessary loss of life on both sides.  He believed that the war could be easily ended.

Trump concluded that Russia’s superior strength would make it the ultimate victor.   Ukraine, dependent on American aid, could be forced to surrender territory and independence, but could survive a while longer.  Zelenskyy would not agree.  Trump angrily stopped all but intelligence support; Europe has been forced to step up.

Trump can either help Russia by promoting a deal including its demands for a weakened Ukraine or help Ukraine by backing its resistance to the invasion that is gradually weakening Russia.  This is the American policy choice, one in which aggression could either be ignored and rewarded or rejected and punished.

Though the U.S. claims it is the only entity in the world that could foster an accord between the two sides, Trump has apparently failed to recognize that even the U.S. cannot bring about a deal.  Russia’s Putin will not relent in his ambition as long as Russian resources permit.  Ukraine’s Zelenskyy will not surrender his country’s independence.  The U.S. may just walk away.

Trump has made his choice, based on an inadequate understanding of Ukraine and European history.  But it is a false choice, because ultimately, it is not his to make.

Jobs vs. inflation

The Federal Reserve has been given two tasks:  to limit inflation and to promote full employment.  An independent board, it seeks to find a balance between these tasks by carefully controlling the supply of money in the American economy.  It usually follows its own economic analysis and judgment, immune from short-term political demands.

Political action on the economy, usually reflecting presidential policy with congressional approval, takes place through fiscal policy – setting the level of government spending and the taxation and borrowing to cover it. 

Thus, one of the two elements of government economic policy is dominated by political considerations and the other is based on economic analyses, insulated from politics.

Congress has assigned the Fed its independent role, but presidents may be tempted to try to influence it to align with their political goals.  When they try to control the Fed, conflict is inevitable. 

Trump wants lower interest rates, which he believes will stimulate the economy, assisting him redeem some of his campaign promises.  He is unconcerned about the inflation that an overly aggressive policy could cause, eroding the value of the dollar.

He believes that his upcoming choice of a new Fed chair can produce his desired result.  His Fed would lower interest rates to emphasize job creation over controlling inflation.  He would replace the Fed’s effort to meets its dual responsibilities with his choice in favor of one of them.

By setting interest rates and using other measures to control the money supply, the Fed can have a direct and immediate effect on inflation affecting individuals and businesses. Because they rely on credit, their costs may immediately rise or fall.

Job creation is less direct.  By lowering employers’ interest costs, the Fed may assume they will increase investment, potentially creating jobs.  But companies may pocket gains rather than investing them or might employ more automation.  In short, the Fed’s job creation efforts are less direct than its anti-inflation moves and resemble trickle-down economics.

The Fed’s obvious answer is to make a balanced choice.  Trump’s choice is to override its independence.   If the Supreme Court backs him, which seems unlikely, he could have his way and end the independent role of the central bank.

Federal Reserve should survive Trump bluster

 

Gordon L. Weil

As courts deal with President Trump’s executive orders, people have come to understand that judges make decisions influenced by their politics.  Hardly a news item about a court decision appears without mentioning the president who appointed the judge.  The underlying message is that Republicans appoint reliable conservatives, while Democrats name liberals.

If judges don’t perform independently, courts end up looking partisan, as the Supreme Court does.  Trump spokespersons help promote that belief by attacking judges when the president’s policies face setbacks.  He thinks judges should follow the lead of the president who picked them.

Trump is now also trying to bend the Federal Reserve, the nation’s central bank, to his will. The Fed sets short-term interest rates that have broad economic effects. He wants lower rates that, he believes, will spur growth and reduce the interest costs on the federal debt, which has been sharply increased by his policies.

He focuses on who will be the Fed chair.  As with other of his policies, he would go back to a time when the Fed’s Board of Governors and its rate setting Open Market Committee, adopted rates set by the chair.  Trump believes that a new leader, supportive of his views on interest rates and even taking direction from him, will be able to bring down rates.

Just as judges are supposed to reflect the leanings or the partisan stance of the presidents who appointed them, Trump believes that Fed governors should similarly follow the election results rather than their economic analysis.  He would like to easily replace Fed governors, shaping the Board to follow his will.

In effect, the last remaining major “court” would be stripped of its neutrality.   The Fed makes decisions that affect almost everybody, unlike most legal rulings, so if it lost its independence, the effect would flow across the entire economy.

The federal government deploys two major tools to influence the economy.  One is fiscal policy, wielded by Congress and the president, and it focuses on spending and taxes.  The other is monetary policy, managed by the Fed, and it focuses on the value of the dollar, often measured by the rate of inflation that can gradually reduce its value.

Fiscal policy is meant to be political.   Monetary policy, with the goals of taming inflation and promoting job growth, is supposed to be isolated from politics, and it usually is protected.  As a sign of its intended independence, Fed governors are appointed for 14-year terms, thus insulating them from election results.

The Fed is not taxpayer financed.  It receives payments from banks and its own trading in money markets.  It is a combined public-private entity, acting independently in line with the judgments of the governors and the presidents of the regional Fed banks, who are chosen by their own boards.

This is the system that Trump wants to change.  It has generally worked well, though possibly moving slower or faster than would be ideal.  It has tried to keep interest rates low and employment high, both part of congressional mandate.

In a rare break from Fed neutrality, President Nixon, facing reelection, induced its chair to lead the Fed into cutting interest rates.  The result was raging inflation.   Soaring interest rates were halted under a new Fed chair, using astronomical interest rates and causing a recession.  President Reagan reaped the political reward for the ultimate recovery.

The Fed no longer works that way.  Trump has attacked Fed chair Jerome Powell, his own pick for the job, for not cutting rates.  The president may fail to understand that the chair no longer calls the shots.  Votes on rates by the Open Market Committee, composed of Fed governors and selected regional Fed bank presidents, are public, but Trump seems to ignore them.

Last week’s vote showed a three-way split. The majority, including Powell, supported a small rate reduction; some opposed any reduction; one wanted a bigger cut.   Trump wants next year’s new chair to lead the Fed into making deep cuts.  But his appointee is likely to prove as independent as Powell.  And Powell could remain on the Board as a governor.

While the Supreme Court has supported stronger executive power for Trump by allowing him to fire independent agency members, it seems ready to protect the Fed.  It recognizes the intent, virtually from the outset of the country, to have an independent central bank.  So does Congress.

Both understand that the independent Fed has given the world a currency of reliable, long-term value.  The U.S. dollar is recognized as the principal reserve currency by other countries and businesses around the world.  Trump’s own National Security Strategy would retain the dollar’s role.

In the end, Trump’s effort to have his new chair seize Fed control is likely to amount to nothing more than futile and distracting bluster.

Trumps policies falter; 'The economy, stupid' -- once again

 

Gordon L. Weil

“The economy, stupid.”

That phrase, posted by strategist James Carville in Bill Clinton’s 1992 campaign headquarters, has entered American political mythology as a revelation of dazzling brilliance and simplicity.

It isn’t.  It’s an eternal political truth; campaigns are always about the economy, though that’s not always recognized.

Inflation is the immediate problem.  Reacting to voter unhappiness with prices under the Biden presidency, Trump promised: “Starting on day one, we will end inflation and make America affordable again, to bring down the prices of all goods.”  Apparently, many voters, having lost faith in the Democrats, believed him.

Yet, inflation in September was higher than in the last full month of the Biden administration.  Trump runs the risk of facing the same kind of voter frustration with prices that brought him to office.

He asserts that the economy is sound, and people will soon see that he has kept his campaign promise.  Of course, that’s not quite the same as the “day one” promise.

Trump may claim that all is well and getting better for several reasons.  The stock market is soaring, and he may see it as a good representative of the national economy.  Yet its performance might reflect excess optimism about the rapid deployment of AI, which may not happen.  If that bubble bursts, it could harm both the market and the economy.

He may also be only looking at a slice of the American public.  Surveys suggest that Republicans, the wealthiest people and investors are positive about the economic outlook.  But they are out of step with everybody else.  While they wield great economic power, they are not the mass of voters.

Trump’s tariff policy contributes to inflation, though not as quickly as foreseen in some dire forecasts. His team takes credit for the limited early impact, ignoring the lags inherent in economic change, and that inflation will thus increase as the months roll by.  Importers will absorb less of higher tariffs than at the outset, with more costs being passed on to consumers.

By applying across-the-board tariffs, Trump failed to take account of American dependence on certain products that cannot be replaced by U.S. production.  Big price increases have occurred in coffee, women’s clothing and electronics.  Seeing the trend, he has begun lowering some agricultural tariffs.  There may be more reductions to come.

When President Reagan took office facing high inflation, he left it to the Federal Reserve to take the unpleasant measures needed to lower it.  The policy amounted to saying it will hurt more before it gets better.  Reagan remained blameless, while the Fed raised interest rates.  The Fed tamed inflation, but caused much pain in doing it.

By contrast, Trump has plunged in and tried to get the Fed to cut interest rates, which he argues will promote growth.  His pressure may have influenced the Fed, slowing a reduction in inflation.  To the extent that his policy fails, Trump, unlike Reagan, may get the blame.

Housing is a special problem, with demand exceeding supply.  Inevitably, that scarcity drives up prices.  One underlying factor is that by eliminating immigration, the government has cut labor force growth needed for housing construction.

The tariff policy has also had an unanticipated rebound effect.  The U.S. may cut imports and bring production home, but it may lose exports due to retaliation.   After U.S. auto tariffs forced two American carmakers to close some Canadian production, Canada removed a tariff-free exemption on some of their exports to its market, costing the carmakers solid sales. 

One key to Trump’s approach is his heavy reliance on cheerleading to overcome people’s worries about the economy.  An old song included this line: “Wishing are the dreams we dream when we're awake.”  

Unlike the song’s lyrics, wishing won’t make it so.  Trump offers dreams more than paycheck reality.  People pay the price at the check-out counter, an experience that Trump may have missed.  No amount of telling them that it will soon be better, without evidence for the claim, can change the higher costs that people pay.  Dreams can become nightmares.

Trump’s problem, one he shares with many others who have occupied the White House, is in taking responsibility for the state of the economy.  This overstates presidential influence; the economy is usually influenced by a myriad of factors outside of their control.  

In this case, however, Trump’s trade, immigration and Fed games have put him squarely in the game.  He exudes confidence in these initiatives, while they produce uncertainty and come up short on promised results.

Even if he abruptly alters policies, the inevitable economic lag will mean the effects of his past moves will be felt next year.  In short, he has handed Democrats a major issue to boost their 2026 congressional campaigns.  The economy, stupid.

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.

Trump attacks Fed's Powell

 

Gordon L. Weil

President Trump wants lower interest rates. He sees Federal Reserve Chair Jerome Powell as standing in the way.

He wants Powell to resign, but the Fed Chair won’t go.  Trump resorts to childlike name-calling, as if the misplaced ridicule will drive Powell to quit. That doesn’t work.

This is not the first time a president tried to get the Fed to support his policy.  Before the 1972 election, President Nixon wanted Fed Chair Arthur Burns to lower interest rates.  Using a wide array of tactics and threats, he induced Burns and the Fed to lower rates.  The long-term result was wild inflation, forcing the Fed later to impose extremely high rates.

Trump would like to fire Powell, just as he has dismissed members of regulatory bodies.  He has been almost completely successful in those moves because the Supreme Court has backed his concept of an all-powerful president.  But only “almost.”

In a May decision endorsing Trump dismissals, the Court responded to the departing regulators’ argument that its position could threaten the independent Fed: “We disagree. 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.”

The Court thus went out of its way to insulate the Federal Reserve from the powers it confirmed that Trump enjoys to remove members of supposedly independent regulatory bodies.  He was left only with the power to remove Fed officials “for cause.”

A person could be fired for cause if they had acted illegally, misused their office or had become incompetent.  Trump claims that Powell mismanaged the renovation of the Fed’s headquarters, enough for him to be fired for cause.  His actions on Fed interest rate policy are not a cause to fire him, though that’s obviously Trump’s intent.

Powell would likely resist any such dismissal and the matter would go to court.  Unless it changes course, the Supreme Court would protect Powell and the Fed’s intended independence from the politics of the day.  He could argue that he’s not responsible for building management and that no federal money is involved with costs being paid by banks.

An even more compelling reason for Trump not to try to remove Powell is the worldwide economic reaction.  The U.S. dollar plays a unique reserve currency role, and one major task of the Fed is to protect its value.  If a president could undermine that role for short-term political purposes, the world economy would be affected.

If the dollar’s status, reflecting international confidence in it, is threatened, then everything everywhere in the world will become more expensive.

Trump’s vacillating trade policy has led to domestic and international concern about American economic reliability. The doubt created by that concern translates to higher interest rates.  Attacking the Fed, Trump would make matters worse.

Surprisingly, a well-known economist urges Powell to resign, saying that continuing attacks on him will weaken Fed independence.   He ignores the certainty that Trump would replace with an ally who would follow the president’s policies rather than exercising the necessary independent judgment.  Economic expertise obviously does not produce political insight.

Powell does not set rates by himself.  The 12-member Open Market Committee decides.  For his removal to meet Trump’s demands, the rest of the members would have to be meek followers of whoever is the chair.  They aren’t.  Right now, some of them are reported to oppose any cut, while Powell foresees one or two this year.

Trump wants lower rates to encourage more borrowing for economic growth.  While they might somewhat offset the inflationary effect of his tariff policy, they could overheat the economy.  He also wants to keep up with other countries that have lower rates.  The Fed looks at the economy from a different and more long-term perspective than the president.

Trump’s concern may not be helping the economy as much as helping himself get past a recent huge increase in the national debt.   It may be the main point behind Trump’s position, though it is rarely stated. 

Trump’s One Big Beautiful Bill will increase the national debt by more than $3 trillion.  The federal government will have to pay off that debt and the interest on it that continually accrues. If the Fed lowers interest rates, those rates apply to federal debt and could lower the payments that must be made on the new debt.

By cutting interest rates, it could cut the cost of the OBBB.  That matters because the cost of servicing the national debt, even before OBBB, was greater than all defense spending.   Saving on debt service cushions somewhat the growing cost of chronic deficit spending.

Helping Trump meet this goal is not the Fed’s prime responsibility.  It is supposed to keep inflation down and employment up.  The inherent conflict between them and Trump’s urgent need to reduce the debt are at the core of Trump’s hostility toward Powell.  But it is not working.

Facing widespread insistence on the Fed’s independence, Trump seems to be backing down.  Treasury Secretary Scott Bessent asserts that the Fed engages in “persistent mandate creep into areas beyond its core mission.”  His conclusion: “What we need to do is examine the entire Federal Reserve institution and whether they have been successful.”

Fair enough.  Maybe whoever does that ought also to examine the entire Trump economic policy and whether it has been successful.  To many, he looks like the maestro of mandate creep.

 

This group could decide the election

 

Gordon L. Weil

A dozen people will meet behind closed doors next month and make a decision that will heavily influence the presidential election and might even decide it.

They are not politicians. They are a group of almost anonymous economists and bankers who will set the interest rate affecting everything from mortgages and housing to credit cards and pensions. 

Its decision will have an immediate and nationwide impact. That’s more real change than most economic policy actions by the president.  And it could also determine the election.

The group bears a technical sounding name: the Federal Open Market Committee or FOMC.  But its effect is hardly technical.  It is coldly practical, and its decision will cascade through the economy the minute it is announced at two o’clock on the afternoon of September 18.  This will come at the end of the only FOMC meeting scheduled before the elections.

The FOMC is poised to lower interest rates.  That’s a big deal and is expected to be politically popular.  Coming while a Democratic president holds office, the lower rates could boost the Democrats’ election chances.  Yet the decision will be a judgment based on economic factors, information available to the public, and not on politics.

The FOMC supports the Federal Reserve, which has two major tasks – keeping employment high and inflation low.  It’s a balancing act, because promoting one goal can produce negative results for the other.

Many people have faced a higher cost of living and assign blame to high interest rates.  Whatever the underlying factors, a majority holds President Biden responsible, with inflation being a key contributor to his unpopularity.  Lower rates and resulting lower prices could boost the chances of Kamala Harris.

Donald Trump has been an advocate of lower interest rates, a position that has political appeal.  He has come to dislike the rate policy of Jerome Powell, the person he had appointed as the Fed chief.  Recently, Trump has favored waiting to lower rates to deny political help to the Democrats. 

Trump backers have suggested that presidents ought to take part in setting interest rates.  If the president played such a role, it would be like their having a say in Supreme Court decisions.  Now, the president’s role with both the Supreme Court and the Federal Reserve Board consists of appointing their members. 

Presidents are supposed to keep away from these economic decisions.  Otherwise, short-term politics can seriously harm the national economy.  Leading central banks around the world, like the Fed, are kept independent of political leaders by law. 

The Federal Reserve has traditionally kept its distance from presidential politics, especially following a major crisis about 50 years ago when Fed policy got too close to a campaign. Since then, they have been a carefully reserved Reserve.

The FOMC is composed of twelve members:  the seven members of the Board of Governors of the Fed, appointed by the president for 14-year terms, plus five representatives of regional Federal Reserve banks.  The FOMC votes are made public, and, unlike the Supreme Court, there is remarkable agreement among the members, no matter their political affiliation.

Following the Great Recession of 2008 and the Covid crisis beginning in 2020, employment fell, eventually leading the FOMC to stimulate the economy by setting interest rates at zero.  Then, as the economy improved, it raised rates to block inflation by slowing business investment. 

Its policy worked.  First, unemployment was sharply cut.  Then, the FOMC raised rates back to traditional levels.  Price increases have slowed, but so has employment growth.  

Here’s where politics comes in.  People had grown accustomed to the low interest rates used to stimulate the economy.   When the FOMC increased rates, it intended to slow economic growth and reverse inflation.  But many people liked low rates, so grew unhappy with the FOMC interest policy.

The Fed has tried to bring about what is called a “soft landing.”  In dealing with both employment and inflation problems, it had to avoid pushing too hard either way, because it wanted to avoid a recession.  That’s a tough challenge, not always popular, and it seems to be working.  But the Fed has struggled to get the right timing for its moves.

If, by its decision in September, the FOMC lowers costs in the economy, almost everybody will take that as good news.  Their new optimism, probably accompanied by higher stock market values, could have a political effect.  With Trump now holding a slight lead on his ability to handle the economy, it could help Harris.

The cut won’t be huge, either a quarter or a half percent, but it will produce lower costs for people and businesses.  In this short campaign, that could be a big influence on how people vote.  Let’s see how the hot politics of a cold economic decision play out.