Even changes to the design to reduce costs – the Fed has removed some of the more ostentatious features of the original design – are being seized on by Republicans as evidence of unethical behaviour because what’s being built is different to what Powell told Congress would be built.
The faux angst about the management of the project is clearly a pretext. A recent US Supreme Court ruling made it clear that, unlike other government agencies, where Trump’s authority to sack leaders and staff has been upheld, the Fed is different. Its chair can’t be removed without cause.
Trump is criticising Federal Reserve chair Jerome Powell over the refurbishment of the Marriner S. Eccles Federal Reserve building in Washington, DC.Credit: Bloomberg
Trump wanted to sack Powell during his first term, but discovered then that he didn’t have that power. As is now the case, he clashed with Powell over the Fed’s unwillingness to cut interest rates.
He’s been repeatedly calling for a three percentage point reduction in the federal funds rate (equivalent to the Reserve Bank’s cash rate), even though the US inflation rate is well above the Fed’s 2 per cent target, at 2.7 per cent, and rising because of Trump’s tariffs.
After three 25 basis point cuts last year, the Fed has left the target range for its policy rate at 4.25 to 4.5 per cent while it waits to see the full effects on inflation of Trump’s barrage of tariffs.
Trump may say that it’s unlikely that he will fire Powell (while waving around a draft dismissal letter and canvassing congressmen and women for their opinions), but he’s clearly fishing for grounds to do so.
Powell has been adamant that he’s going nowhere before his term as chair ends in May next year.
The first inkling of what transpired within the White House on Tuesday came via a post on X by Republican congresswoman, Anna Luna, who was at the meeting. She posted, on Tuesday, that she was “hearing that Jerome Powell is getting fired. From a very serious source.”
The rumours that an attempt to sack Powell might be underway rattled markets, with the sharemarket, longer-term bond prices and the US dollar all falling on Wednesday before recovering some of their ground after Trump’s comments.
That provides a directional insight into what might happen if Trump were to move against Powell – or replace him next year with someone clearly prepared to do what Trump wants. Most of the small group of those auditioning for the role, all Trump loyalists, are signalling (naturally, if they really want his endorsement) that they want lower rates.
Trump’s antics regarding Powell have markets on edge.Credit: AP
On Wednesday, the sharemarket fell nearly a full percentage point before closing down 0.3 per cent for the day. The yields on short-term bonds fell, but those on longer-term bonds rose. Credit spreads widened. The US dollar weakened almost one percentage point against the currencies of America’s major trading partners.
That’s a modest preview of what might be in store if Trump were to succeed in installing a loyalist in the Fed’s chair.
Lowering rates while inflation is rising within a full-employment environment would be reckless policy, risking inflation. While sharemarket investors might like lower interest rates, and short-term bond yields would reflect a lower-rate environment, the increased inflation risk and the risk of stagflation would see longer-term bondholders demanding increased compensation for their longer exposure to those risks.
Trump and his advisers don’t appear to appreciate the potential consequences of trying to replace Powell with a “yes man.” (All those being touted as chair are male).
The markets trust the Fed to be independent of politics and political cycles, focusing purely on its twin mandate of price stability (controling inflation) and maximising employment. If that independence is threatened – if they think Trump or some future president can dictate monetary policies – there will be a scramble to exit financial markets.
The dollar will dive, the sharemarket will fall and the yield curve will steepen significantly, with the yields on long-term bonds rising even as those on short-term securities fall. It is, given precedents elsewhere (Turkey and Hungary come to mind), likely that America’s credit rating, once AAA, would be lowered again.
The Fed can provide the anchor for the yield curve and influence short-term rates, but market participants, a substantial proportion of them foreign, determine the shape of the yield curve and how much extra yield they want for the risk of holding bonds for five, or 10, or 30 years.
Even a perception that the Fed’s independence had been compromised would probably result in a significantly steeper yield curve – and higher interest rate on consumer and corporate debt. The market establishes those rates, not the Fed.
The other problem for Trump is he tries to politicise the Fed and its decision-making is that there is no guarantee that a new chair would be able to impact rate decisions.
Trump wanted to sack Powell during his first term, but discovered then that he didn’t have that power.
There are 12 members of the Open Market Committee that makes those decisions, so the chair – and the committee elects its own chair, which would be different, if they wished, to the chair of the board of governors – would have to convince a majority of them to do what he and/or Trump wants.
One of the peculiar – and disconcerting, if the US president’s mental health is a concern as he radically transforms the US and global trade, economic and institutional landscapes – elements of Trump’s musings about Powell was a comment about Powell’s performance as chair.
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“He’s a terrible Fed chair. I was surprised he was appointed. I was surprised, frankly, that Biden put him in and extended him. But they did,” he said.
Er, it wasn’t Biden, but Trump himself who, in 2017, appointed Powell chair of the Fed.
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