Carney, Powell stand up to Trump

Gordon L. Weil

President Trump seems to convert almost all leaders into fans, mostly because they know he thrives on flattery.  He readily accepts their artificial praise.

The media likes to report how he forces skeptics or critics to appease him in pursuing their own interests.  They end up settling for less than his original demand and consider the deal a win or else helplessly let him take advantage of them.

But this week, two people have carefully stayed on their own course despite his pressure.  Canada’s Prime Minister Mark Carney and Federal Reserve Chair Jerome Powell stand out from crowd.

When Trump first sharply hiked tariffs, then Canadian Prime Minister Justin Trudeau promptly retaliated.  His countermove, rare among the early U.S. tariff victims, was designed to get the U.S. to retreat.  Tariffs between the two countries soared to the point that would harm both sides.

To his credit, Trump realized he had gone too far, depriving the U.S. of needed fuel and raw materials.  He eliminated tariffs on trade under USMCA, the trade agreement among the U.S., Mexico and Canada.  Major barriers remained on steel, aluminum, autos and softwood lumber. 

The Canadian government changed when Carney took office.  Politically, he could not quickly reciprocate for the Trump cut, though he recognized that its effect on essential imports was harming Canadian consumers and industry.   He also found that the overall effect of the USMCA preference gave Canada the lowest U.S. tariff at 5.6 percent.

Trade talks repeatedly missed deadlines as Canada held firm.  To negotiate with the U.S. and provide some relief to Canadians, Carney has just reciprocally reduced Canadian tariffs to the USMCA level.  Some in Canada erroneously saw this move as appeasement, ignoring the fact that the U.S. had moved first.

Before acting, he called Trump, who apparently accepts Canada’s independent policy and recognizes U.S. dependence on some Canadian imports.  The New York Times reported that Trump said that he and Carney “are working on something.”  He continued, “We want to be very good to Canada. I like Carney a lot. I think he’s a good, good person.”

Carney had been ready to seek other trading partners.   Now, a deal on autos is likely and accords on the other three products are possible.  The U.S. and Canada may also be finding areas of agreement on the upcoming revision of the USMCA, under which Mexico has gained the most benefit.

If Trump has kind words for Carney, despite the Canadian’s independent stance, he does not hold back when it comes to the Federal Reserve’s Powell, whom he calls a “numbskull” for refusing to cut interest rates.  He’s gradually realizing that Powell does not act alone and that the kind of deep cuts he wants aren’t likely, no matter who sits on the Fed’s Open Market Committee.

Powell, who clearly believes in the Fed’s independence from the politics of the day, appropriately refrains from answering Trump’s attacks.  To do so would plunge the Fed into politics.

The Fed’s missions are maintaining full employment and controlling inflation, striking a delicate balance with the entire world waiting to judge its actions.  In recent years, it has leaned toward the fight against inflation.  Now, Powell’s analysis suggests that the Fed can ease up on inflation and reduce the interest rate until it sees the impact of higher U.S. import tariffs.

The current Federal Funds interest rate, used for lending among banks and dominating short-term interest from credit cards to mortgages, is set between 4.25 and 4.5 percent.  In July, two Trump appointees favored a one quarter percent cut, hardly the three percent that Trump wants, while the majority left the rate unchanged.  The media exaggerated this small difference.

Trump and his economists could have sat with Powell and made the case that the inflation risk is less worrisome, avoiding the usual unrealistic demands and threats.  The president would have been playing, perhaps persuasively, on the Fed’s court, but that’s not his style.

Instead, Trump attacked.  Based only on an unsubstantiated charge that a Fed member had cheated on a mortgage application, he demanded her resignation.   Knowing that it was grandstanding, the Justice Department baited Powell by demanding he fire her, though he has no such power.

The U.S. and much of the world depend on a soundly managed American economy and dollar, still the international reserve currency.  Trump would willingly endanger both if he could claim before the next election that he had boosted the economy to new heights.  He expects his Fed appointees to be his foot soldiers in this effort.

There’s no doubt that higher tariffs will increase some costs and prices.  Trump cannot make Powell responsible for that, simply because he won’t lower interest rates.  Trump may not understand that, but Powell does and holds firm.  So far, that works. 

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.