Donald Trump has probably sailed close to the wind all his life, and why should his tenure at the White House be any different? While he is presiding over a strong economic growth era, one not only he wants to be credited for but also one Barak Obama, he is putting a massive burden on this boom by escalating a trade war with China and being on the brink of fundamentally disrupting other trade relationships America has built over decades.
The pressure is starting to show. The prospect of higher tariffs has led a number of industrial companies dependent on global trade and with China, in particular, to reduce their profit forecasts as margins get squeezed. In a double whammy, rising rates are starting to bite. Consumption is tapering off, and mortgage applications have been subject to a substantial decline. The stock market has obviously taken notice, and we have been forced through an undesired price rollercoaster of late.
It was only a matter of time that Trump picked up on it, yet again. He had been critical of Jay Powell and the Fed before for relentlessly raising interest rates. On Tuesday night he stepped up the rhetoric by saying he “maybe” regrets appointing Powell to the post and demurred when asked under what circumstances he would fire the Fed chair. It was an intentionally sent message to Powell that, despite nominally acknowledging the independence of the Fed, he wanted lower interest rates.
This constitutes unprecedented behaviour by a US president and typical tactics by Trump to deal with adversaries. How many times have we heard him praise a person as wonderful, lovely, great, you name it, only to set the stage of attacking him or her to the fullest. Look around the globe, as he has applied this with foreign leaders many times over. Or look no further than his own cabinet members he wants to get rid of, defence secretary Mattis being the latest case in point.
Is it even possible to fire a Fed chair before the end of his terms? People have been scrambling to find out. Section 10.2 of the Federal Act does indeed provide a technical outlet for the chair to be relieved of his duties. The clause reads “… unless sooner removed for cause by the president”. So there is a way, even though the cause is unspecified. It certainly is not having a view on America’s economic state and how Fed members vote on the direction of the country’s monetary policy.
In other words, policy disagreements are not sufficient cause for Trump to fire Powell. But “maybe” this is not even what he is after. He has put Powell on notice hoping that his concerns are being heard and will be considered going forward. Subtlety isn’t Trump’s forte, and he can probably not help but speak his mind. With the stock markets beginning to be in disarray and the economy potentially tapering off, he needs a culprit as he usually does, and not even the ivory towers of the Fed are sacred to him.
Whatever his interference will cause, however, the Fed is already the biggest loser in this spat. Any action by its chair going forward will be scrutinised against the Trump threat. If he decided to stay the course, people might speculate that he would rather be driven by his defiance of Trump than his conviction that higher rates are appropriate in the environment. If he decided to change course and become more accommodative again, he might be seen as neglecting his mandate and kowtowing to Trump.
Nothing less than the Fed’s credibility has been put on the line here, which is a huge mistake to being with. But then, forget independence. Trump has made sure that there will be none left. To him, the Fed is probably nothing else than a tool for his purposes, a vicarious agent of sorts.
