President Trump is threatening to fire Fed Chair Jerome Powell. Let's recap how we got to this point.
"Fed a Bigger Problem than China"
On November 27, in a WSJ interview, Trump stated that the Fed is a Bigger Problem than China.
President Trump: Well, let’s see what happens with Jay Powell. So far, I can tell you – I said it the other day, and I’ll say it again: I think the Fed right now is a much bigger problem than China. I think it’s – I think it’s incorrect what they’re doing. I don’t like what they’re doing. I don’t like the $50 billion. I don’t like what they’re doing in terms of interest rates. And they’re not being accommodative at all. And I’m doing trade deals, and they’re great trade deals, but the Fed is not helping. Whereas, China, you know, they have automatic accommodation.
Far Too Aggressive
On December 11, Trump said Powell was “being too aggressive, far too aggressive, actually far too aggressive.” He told Reuters the central bank “would be foolish” to proceed with a rate hike.
Immediately ahead of the Fed's last rate hike, president Trump fired off a pair of Tweets.
The "50 B's" is likely a reference to the Fed’s policy of reducing its balance sheet by a maximum of $50 billion each month.
On December 19, the Fed hiked rates. On top of the hike, Powell reiterated that quantitative tightening of the balance sheet would continue on automatic pilot.
Subsequent market declines put trump over the edge
Trump Threatens to Fire Powell
Bloomberg article Trump Discusses Firing Fed's Powell After Latest Rate Hike has created quite a stir. Nearly every other news agency copied it or quoted it.
President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate hike and months of stock-market losses, according to four people familiar with the matter.
Advisers close to Trump aren’t convinced he would move against Powell and are hoping that the president’s latest bout of anger will dissipate over the holidays, the people said on condition of anonymity. Some of Trump’s advisers have warned him that firing Powell would be a disastrous move.
Yet the president has talked privately about firing Powell many times in the past few days, said two of the people.
Can Trump Fire Powell?
Members of the Fed’s Board of Governors “are appointed for a 14-year term and may be removed from office by the President only ‘for cause.’
People can make assumptions that "cause" means gross negligence but since it was not defined, it could also mean "lack of faith". Trump clearly has a lack of faith in Powell.
Others note that the Chair is different. It isn't The head of the Fed is also a Governor, and Governors can be removed for "cause".
It’s a Political Question
The Justice Department told LBJ in 1965 he didn’t have that power, but the law has since evolved.
The Wall Street Journal has an excellent discussion of the matter entitled It’s a Political Question.
last month Mr. Trump told the Journal: “Let’s see what happens with Jay Powell.” Can he raise the stakes by forcing the chairman out? He isn’t the first president to ask the question. More than 50 years ago, Lyndon B. Johnson had a similar conflict with Chairman William McChesney Martin. No, Deputy Attorney General Ramsey Clark answered in a memo.
That sounds like good news for Mr. Powell. Unfortunately for him, a lot has changed. For one thing, the Supreme Court has repeatedly limited Congress’s ability to restrict presidential control of independent agencies. In Free Enterprise Fund v. Public Company Accounting Oversight Board (2010), for example, Chief Justice John Roberts wrote for the court that “the President cannot ‘take Care that the Laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them.”
Further, the lawyers were probably wrong in 1965 about the implications of the chairman’s four-year term. In 1976 Congress passed a law establishing a 10-year term for the director of the Federal Bureau of Investigation. As with the Fed chairman, that statute does not expressly prohibit the president from removing the FBI director at will. Under the Justice Department’s logic in 1965, it would follow that the president lacks the authority to fire the FBI director except for cause. But both Bill Clinton and Mr. Trump fired their FBI directors before the term expired. The Fed is different from the FBI in a lot of ways—but probably not in this one.
How the play ends depends not only on Donald Trump and Jay Powell, but Congress and the political process. If Americans and their representatives embrace Mr. Trump’s campaign against the Federal Reserve’s independence, no law will protect it.
The WSJ article was written by Peter Conti-Brown, an assistant professor at the University of Pennsylvania’s Wharton School of Business, and author of “The Power and Independence of the Federal Reserve”.
Ability to do something and desirability of doing so are two different matters.
Firing Powell would likely further rattle the markets, send gold soaring and the dollar down.
Moreover, Trump cannot fire Powell and replace Powell with a dove. The Senate has to approve the next Fed Chair and at a minimum, there is considerable doubt that it would let Trump get away with such tactics.
Regardless, Trump, through a series of bone-headed moves on tariffs and now Fed policy is increasing market volatility.
Yapping No Longer Works
On Friday, New York Fed president John Williams attempted to placate the markets, but it didn't work: When Yapping No Longer Works
Also on Friday, Treasury Secretary Mnuchin tried to placate the markets calling stocks a "tremendous value". He is entitled to absurd beliefs, but not absurd reality.
In other statements Mnuchin proved he is Totally Clueless About How Markets Function.
End the Fed
To be sure, I want to end the Fed and let the market set interest rates. However, firing Powell will not accomplish that mission.
The Fed has proven it has no idea where interest rates should be. Neither does Trump.
Mike "Mish" Shedlock