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.