Trump's fixation on removing Powell ignores real risks

Bloomberg News

A funny thing happened last week: it's late on a Friday, and into my inbox pops a statement from Federal Housing Finance Agency Director Bill Pulte offering a statement on "reports" that Federal Reserve Chair Jerome Powell was considering resigning.

I won't quote the statement but suffice it to say it didn't illuminate much beyond what we already know about Pulte's view on Powell. But the effort to plant a rumor in the press via an official release from a federal agency represents an intensification of President Trump's longstanding effort to force, shame, bully or otherwise effectuate the Fed chair's departure.

I say this is Trump's effort, and it certainly is. But it has evolved from an occasional and somewhat quixotic social media hobbyhorse for the President into a broader concerted effort by his lieutenants to dislodge Powell from his perch atop the Fed — and sooner rather than later. 

Pulte's statement comes as Republican leaders in the Senate — including Senate Banking Committee Chair Tim Scott, R-S.C. — have opened a new front against the Fed chair, accusing him of mismanaging major and ongoing renovations to the Fed's headquarters in Washington. Scott and a handful of other committee Republicans said in a letter to Powell released ahead of his semiannual testimony before the panel that the renovations and their lavish appointments — again, attributed to unnamed news reports — represent a mismanagement of public funds at a time when many ordinary Americans are facing tough economic times.  

"At the same time Americans are struggling to put food on the table, the Federal Reserve has been spending billions of dollars on the renovation of two of its offices in Washington, DC.," the letter reads. "Multiple media outlets have reported that these renovated buildings will include amenities that average Americans could never dream of, rooftop garden terraces, ornate water features, new elevators that drop board members off directly in their VIP dining suite, use of white marble rooftop Italian beehives. and a private art collection in the basement."

Whether the Fed's renovations are unacceptably lavish or not is of course a subjective question with no real answer. Federal projects have a very, very long history of mismanagement and cost overruns, and that is bad. I'd even go further and say one could find cases where those excessive costs are due to incompetence or profligacy. But whether the beehives were Italian or not isn't really the point — the point is to create the impression that Powell's handling of these renovations amounts to an abuse or dereliction of duty because an abuse of power would be a fireable offense. Pulte's statement furthers that goal by implying that Powell himself knows he's guilty. 

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But before we get too caught up in whether this strategy of removing Powell might be effective and/or pass court muster, it's worth taking a moment to remember what exactly Trump wants and whether removing Powell gets it for him. 

Before Trump was bashing Jerome Powell — even before he was president — he was bashing the last Fed chair, Janet Yellen, for not raising interest rates, a decision he attributed to a desire by Yellen and the Fed to help his rival, former Sen. Hillary Clinton, during the 2016 campaign cycle. When the time came to choose her successor — and despite changing his tune about Yellen — Trump opted for Powell because he is a Republican, expecting him to continue the Fed's low interest rate trajectory. But only a few months later he changed his mind, since the Fed continued to incrementally raise interest rates throughout the year. So what Trump seems to want is a Fed chair that sets interest rates where he personally thinks they should be.

The problem with this theory of the case is that Federal Reserve chairs don't set interest rates — the Federal Reserve Board doesn't either. That job falls to the Federal Open Market Committee, which is composed of the seven Fed Board members and a semi-rotating cast of regional Fed bank presidents, each of whom have and are entitled to their own views and votes on monetary policy. Those views are myriad but historically have been categorized on a spectrum from "hawkish" — preferring higher interest rates as a general matter — and "doves," who prefer lower rates, all other things being equal. 

As it happens, the Fed board and voting FOMC membership is currently quite dovish, and most of those doves — including Powell — are on the Fed board. So why don't they just lower rates already? Because the economy is in a stable place for now, but budding trade, immigration and fiscal policies could lead to inflation, recession or both. How much of an impact those policies have is uncertain, and as Powell said earlier this month, future rate cuts — or hikes — are  "going to depend on how the data evolve."

In other words, the Trump administration's fixation on getting rid of Powell would not actually do much to lower interest rates in itself. To do that, he would have to replace the entire Fed board — most of whom are already inclined to his way of thinking on interest rates to begin with. Leaving aside the dubious legality of such a move, Trump would have to replace those members with picks that can be confirmed by the Senate, and the Senate historically has been skeptical of underqualified Fed board nominees. To be sure, the 119th Congress has been more deferential to Trump's picks than it was just eight years ago, but it's hard to imagine the Senate confirming several Fed picks purely based on their loyalty to the president.

But even if he did that, Trump might get more than just low interest rates as part of the bargain. The reason why the Federal Reserve's interest rate-setting function is designed to be so diffuse and consensus-oriented is to insulate politicians in power from unpopular choices — for example, maintaining relatively high interest for a long time. Consolidating power has been a prominent theme of the second Trump administration, but it also cuts both ways — if Trump succeeds in bending the Fed to his will, he will own the results.

What the administration may not have sufficiently considered is that the Fed chooses its policies not to be mean, but because the central bankers try to foresee and seek to avoid worse alternatives. Even when global markets and the public don't agree with the Fed's choices, they tend to trust its motives. We will just have to see whether investors and businesspeople trust Trump the same way.