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.

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.