Patrick Watson of Mauldin Economics probes how and why President Trump could fire Federal Reserve Chairman Jerome Powell

Donald Trump by Jacky Carpenter.

By Patrick Watson*

Those worried about the Fed’s so-called “independence” from politics are a little late. The US presidents, who nominate its board members, long ago put political loyalty high on the qualification list.

Now President Trump is unhappy the Fed keeps raising interest rates. Past presidents avoided such comments so they wouldn’t appear to be interfering. But Trump doesn’t care about appearance. He says whatever he thinks - that’s one reason millions voted for him.

The Fed is somewhat insulated from electoral politics, since the chair and board members have staggered terms. Its composition changes slowly... but it doesn’t have to.

Tucked away deep inside the Fed’s founding law is a provision Trump could use to not just interfere but completely rebuild the Federal Reserve Board of Governors.

No one knows if he would do this, probably not even Trump himself. But the power is there if he wants to use it.  

Markets should pay attention. I don’t think they are.


Photo: Getty Images

Looking for a Dove

In recent weeks, the president criticized Federal Reserve Chairman Jerome Powell several times. He doesn’t like that Powell is leading the Fed to raise interest rates.

This shouldn’t come as a surprise, though. Powell’s hawkish bent was well known when Trump nominated him to take Janet Yellen’s chair. He fully supported Yellen’s tightening strategy. We should also note that Powell’s rate hikes have not perceptibly slowed the economic recovery Trump so frequently touts.

So, it’s not clear why Trump is unhappy. If he wanted low interest rates, he could easily have appointed a dovish Fed chair. St. Louis Fed President James Bullard was well qualified and available, as were several others.

For whatever reason, that didn’t happen. But what if Trump could have a do-over?

Maybe he can.


Photo: Getty Images

Breaking precedent

A common perception, even among Fed experts, is that presidents can’t fire the chair and board of governors once they take office. They’re thought to be like the Supreme Court in that regard, although they don’t serve for life.

But that’s not quite correct. The Federal Reserve Act doesn’t explicitly give the US president power to fire the Fed board members, but section 10 has a mysterious little phrase indicating it’s at least possible.

“…thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”

That’s all it says on the subject, as far as I can tell. The Act doesn’t define what the word “cause” would entail. But Congress clearly thought the US president should be able to remove board members before their terms expire, under certain conditions.

This legislative time bomb has been lurking in there for decades. Now we have a president who loves exercising unilateral power in ways his predecessors did not.

  • He’s used the pardon power several times without the normal review process.
  • He fired the FBI director to try and stop a criminal investigation.
  • He imposed import tariffs on imaginary “national security” grounds.

Trump doesn’t mind breaking precedent to achieve his goals. So if he wants to remove Jerome Powell, I think he will do it. No one can stop him.

Would Congress object? Probably, but its members have yet to impose any meaningful constraints on Trump. All he has to do is dream up some “cause” and most will fall in line.


Photo: Getty Images

More than a tail risk

As of right now, the seven-member board of governors has four vacancies, so firing Powell would leave two others in place: Randal Quarles and Lael Brainard.

Neither is as dovish as Trump seems to want, but seeing their chairman get the axe might change their attitude. Or he could fire them too.

Quarles and Brainard are only two votes on the rate-setting Federal Open Market Committee (FOMC). The other members are all regional Fed bank presidents. But in this scenario, Trump would control the board of governors - and the board, in turn, can control the Fed banks.

Furthermore, the Senate may soon confirm Richard Clarida as vice chair. He seems more dovish than the others, so Trump might gladly let Clarida take over.

This scenario, while unlikely, is far from impossible. It may be why Powell’s rhetoric turned more dovish at Jackson Hole.

You might think financial markets would freak out. I’m not so sure. Lower short-term rates combined with higher inflation expectations would steepen the yield curve, enhancing bank profit margins. Debt-driven industries from housing to autos might also benefit.

The long-term damage would be enormous. The US dominates the global economy in part because we have stable, rule-driven institutions like the Fed. Letting politics openly drive monetary policy would remove the aura. Another central bank might rise to fill the Fed’s former role.

Again, I am not predicting any of this will happen. I’m saying it is possible.

Traders talk about “tail risks, ” those remote possibilities that would have huge consequences. The odds Trump will fire Powell or other Fed officials are low, but well above zero. It’s more than a tail risk.

So while the economic data might say the Fed should keep tightening, Donald Trump might have other plans. And if he does, he will probably get his way. 

Combined with the looming trade war, this could easily negate the economic benefits of lower taxes and deregulation. It’s a real risk, and I think few are prepared for it.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the DotsIt first appeared here and is used by interest.co.nz with permission.

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10 Comments

Or someone might have a whisper in Trump's ear and remind him that a higher USD (higher interest rates) are one of his best weapons in the trade war with China. Essentially a buffer against tariffs applied by China, and exacerbating higher costs in China on everything they import from the US.

You assume inelastic demand, and no substitution.

I would think that a lower USD would be even better for the US with a trade war, in that the US exports would remain competitive even with increased tariffs, and the demand for Chinese imports would decline even without increasing tariffs.

Personally, I want a higher USD. From a trade perspective, US wants a lower USD in order to increase export volumes.

I take your point. But it depends on time frames also?

China is probably not going to be able to substitute aircraft, electronics and machinery imports from the US in the relatively short time the trade war lasts. How much does the competitiveness of these products matter if substitutes are limited?

From a broad trade perspective I agree the US wants a lower dollar. But against China, I still think a higher USD exerts much more pressure.

Don't forget USD corporate debt sitting in China as well.
https://www.bloomberg.com/news/articles/2018-07-29/china-s-huge-u-s-curr...

Personally, I want a higher USD also :)

If China cannot substitute/replace imports from the US during the trade war, then the US will win regardless of the exchange rate. This would put the US into a strategic domination position. My view is that substitution/replacement has already been happening.

China plays the long game. US, well... two quarters in the future tends to be the US "long game".

I reckon Donald Trump is doing a good job .

Frankly , someone was eventually going to have to shake up the whole system and grasp the issues of the decline of the US .

Someone was eventually going to have to call China out for its trade practices

Someone was going to have to deal with the problem of having the estimated 25 ,000,000 undocumented illegals wandering around the country getting up to who -only-knows- what , and someone was going to have to deal with its porous borders . Imagine if we had even half a million illegals arriving here , would we tolerate it ?

Someone was going to have to call a spade a spade , and stop all the PC pussy-footing on every issue conceivable

Someone was going to have the balls to say when they were not happy with the Fed or the courts or whatever .

Someone was going to have to call North Korea's BS bluff and bluster which has gone on since 1953

And someone was going to have to deal with Iran's nonsense lying and bluffing while creating a smokescreen around its bomb-making shed .

Someone was going to have to shake NATO up , it relies too much on the US TAXPAYER to foot the bill for peace

Someone was going to have to deal with the UN's anti -Americanism , while Americans foot the bill , paricularly with the UN sending food parcels to terrorists under the guise of humanitarian aid .

Turns out it the person is the maverick Donald Trump .

He is disliked by almost everyone, except for around 51% of Americans who bothered to vote , so he might as well get on with the job of giving the whole system a good and proper shake-out .

There will be casualties and unintended consequences , but at least we have someone in the White House with the balls to take action when needed .

51% of Americans who are probably getting on with their lives and contributing to society.

The small minority that don't like Donald Trump seem to have the loudest voices. They aren't 100% sure of the reasons why they don't like him, i suspect it's no different to them sending an actor death threats for playing the villain on their favorite soap opera.

"I dnt lyk Donald Trump" "Why's that?" "Coz he's a racist".

You are aware Trump lost the popluar vote? 60million to 63 million....

I agree with you on just about all of those counts

The one thing that his presidency has taught me is how Liberal lead the US media are and how much BS they report.

Take CNN for instance, 20 years ago one of the most respected new agencies along side the BBC now they are pretty much part of the resist movement peddling fake news with tabloid like presenters.

Unfortunately that filters down to us through the likes of the NZ herald and Stuff.

Hard to get some honest, bi-partisan news these days...

He's the best American LEADER we've seen since Reagan. There have been plenty of presidents, but no real leaders as such. You'd probably have to go back to the 1940's prior to that to find any Yank leader with any balls.
Leadership is one of the liberals pet hates. They can't stand strong leaders. It's happening in our families as well, they can't stand fathers, especially good fathers.
They're very good at playing the 'let's all do this together' thing, and it changes subtlety as well, but it's driven by angry women. Well educated, power-hungry, and fiercely independent, the feminists are currently succeeding very very well, if you look at all the statistics coming out of America.
My wife said to me 40 years ago that the main reason she left the teaching profession was (is) that it was set up for girls. The boys were an afterthought. And it's still happening. It's even more of a problem today, as young men have no role models, no fathers, no men to grow and become like because the feminists have just about cleared the building of all those nasty, evil, horrible smelling men.
And you wonder why our jails are full.
PS: Go Trump.
PSS: I'm not anti-women. I'm just not sure the feminists know (or care) what the long term effects of this policy is going to be. Already!

Unfortunately, his wish-list is no more maintainable than those of any President in the past. Carter probably understood more of the pending problem than most, but (as Catton pointed out in Overshoot) he still wan't there. Reagan was a waste of time they already didn't have.

Leadership and correctness of pathway aren't necessarily the same thing......