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.
