Trump, the Fed and the trust question

Donald Trump is free to continue attacking the Fed. That is one way to interpret this week's Supreme Court ruling that actually blocked one of his attacks on the Fed, his attempt to fire Gov. Lisa Cook. But the refutation wasn't a shut-the-door denial, It gave him options to continue his assault on the Fed's independence. 

Actually, two openings. The court ruling followed a narrow path: it said the president cannot arbitrarily fire Cook. But it essentially also told Trump he could fire Cook if he can find the right reasons. Moreover, the court issued another ruling on another case in which it said that the president can, in fact, fire anybody in any agency under his control for any reason.

It's possible Trump gets bored with brow-beating the Fed, or is satisfied with the job of his newly installed Fed chair, Kevin Warsh, and stops thinking about the Fed. But knowing Trump, that probably won't happen. We do not know how Warsh will act, nor do we know how the rest of the Fed will act. Remember, for now the Fed board includes Jerome Powell, whom Trump hectored and badgered for more than a year, and tried to get removed. Will this Fed board act in the best interest of the people, or the president? If they cut rates, are they doing it because that's the right thing to do, or because the president wants them to do it?

And regardless of what they say, how will the public know the difference? In other words, can the public trust the Fed? Trust is a currency more precious and scarce than Federal Reserve notes and harder to control than overnight interest rates. You either have it or you don't. William McChesney Martin wasn't a public figure the way Fed chairs are today, but when he talked to bankers he leveled with them squarely – this is the guy who made the punch-bowl metaphor famous – and built up the Fed's credibility. Alan Greenspan did speak publicly, often, and people explicitly trusted every word he said. People believed Ben Bernanke when he promised the Fed would keep inflation anchored despite the trillions' worth of liquidity he was injecting into the markets. The credibility of the Fed has been built up over the course of decades. Part of that belief rested on a perception of the Fed's independence. That is what Trump is attacking, whether he realizes it or not.

I've published four books, and one thing you come to realize as a writer is that there is a difference between what you put in a book and how the people reading the book interpret it. And the reality, as much as writers don't like to hear this, is that the interpretation of the people reading your work matters far more than your interpretation; after all, they're the one who will buy the book (or not) and convince others that it's worth their time (or not). Your readers are the ones who build trust in the work and the words, not you. You have far less control over that process than you think you do.

There is a similar dynamic between the Fed and its audience. The question, therefore, isn't what the president will do next, or the Fed. The question is how the public will perceive what the president does next and how the Fed responds to it, and how the public's trust in the Fed is altered by the perception of those actions.

This is not an academic question. The Federal Reserve is the world's preeminent monetary authority. If I had to guess, I'd say the markets will continue to trust the Fed, for the simple reason that deciding to not trust the Fed will lead to chaos. The thing to worry about is whether the president's attempts to control the Fed will damage its ability to operate to such a degree that people, no matter how much they want to, will not be able to trust the Fed's integrity.