Dark humor, dry wit, deadpan comedy, dire warnings, you name it. Dating back to last February, I’ve employed every rhetorical device in the toolbox in the course of insisting that sooner or later, Donald Trump would attempt to fire Jerome Powell.
It was inevitable. Trump’s fiscal policies amounted to mashing the gas on an economy that was already firing on most (if not all) cylinders and the President’s trade war risked creating tariff-related price pressures. Late-cycle stimulus threatened to reawaken the Phillips curve, driving up wage inflation while the tariffs risked pushing up prices for goods as higher input costs are passed along to consumers.
That combination meant the Fed would be inclined to lean more hawkish than they otherwise might. Trump was warned about this, but he didn’t listen. Additionally, he decided to replace Janet Yellen, despite having said, on CNBC (when he was a candidate) and, famously, during a debate with Hillary Clinton, that Yellen was prone to keeping rates too low in order to perpetuate economic overheating and facilitate rising stock prices. In other words, Trump knew what kind of Fed chief Yellen was and he knew she would persist in the kinds of policies that would be conducive to further gains in stocks and further economic overheating, all of which is exactly what he wants. But his pride got in the way of keeping her on.
Later, after being fired, Yellen explicitly advocated for just the kind of pro-cyclical monetary policy the White House is now begging for, proving, beyond a shadow of a doubt, that Trump fired the person who would have given him exactly what he wanted (although not because he wanted it, but rather because she believes that’s what’s best).
In a February piece for Dealbreaker, I delivered the following warning about Trump and Powell:
I don’t think everyone fully appreciates how soon-to-be precarious this is going to get for ol’ Jay. Just imagine for a second that Trump’s myopic tax cuts and stimulus end up getting him the economic sugar high he’s after and just as he’s shrieking about it at a rally, the Fed hikes rates citing an overheating economy. Trump would go crazy. He would never let that stand. I’m telling you, he’s going to turn into Erdogan when it comes to rates.
Do me a favor and read the following quotes from a speech Erdogan made back in November when inflation was spiraling out of control in Turkey and the lira was plunging:
They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered. Results speak for themselves.
We will solve this, things can’t go on like this.
Who does that sound like to you? I mean besides Erdogan.
If you read the accompanying color from Bloomberg it’s even easier to imagine Trump going this route if Powell gets too aggressive. To wit:
Erdogan [is] vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high.
It’s almost too perfect a parallel. Before you know it, “the swamp” and the “American deep state” will include the Fed governors.
Anyway, don’t say I didn’t warn you.
Again, that was in February – when the notion that Trump would ever move against a Fed chair was still seen as nothing more than fodder for satire, which is how most people read the post excerpted above.
But it wasn’t satire. The allusion to Erdogan was an honest attempt to warn the general investing public. Anyone with any experience in studying how autocrats and populists operate vis-a-vis the intersection of fiscal and monetary policy could see where this was going. In July, Trump essentially told Joe Kernen what was coming next. “I’m not thrilled”, Trump said of Powell.
In the months that followed, Trump took his criticism of Powell from middling to shrill. That is a familiar pattern. He tests the waters on how much he can get away with and then, when he meets no staunch resistance, he ratchets things up.
Within two months of the Kernen interview, Trump was trash talking Powell at the Hamptons home of a hot dog baron – and that was before the selloff. Initially, Trump’s criticism of Powell revolved around the extent to which ongoing Fed hikes were effectively watering down the tariffs by pushing up the dollar, but recently, the President’s ire stems directly from the stock market rout. He’s called the Fed “crazy”, “loco” and “his biggest threat” and we’ve variously argued that he (Trump) will eventually claim that Powell is, like the media, an “enemy” of American prosperity.
None of this is a surprise to political scientists. It is right out of the autocrat playbook as are Trump’s efforts to blame Powell for the selloff while papering over the role played by his own domestic and foreign policies. By the time the December Fed meeting rolled around, Trump was on Twitter, essentially instructing the Fed not to raise rates and demanding that Powell “feel the market”.
Powell did not “feel the market” – he hiked again and, sure enough, Trump is now privately discussing firing the Fed chair.
“President Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate increase and months of stock-market losses,” Bloomberg reports, citing four people familiar with the matter, and adding that “some of Trump’s advisers have warned him that firing Powell would be a disastrous move.”
Yes, it would be a “disastrous move”. It would open the door to the market questioning the credibility of the Fed. And please, do me a favor here: take a second to internalize what I mean when I say “questioning the credibility of the Fed”. Obviously, doomsday blogs, QE critics, those who despise the academic bent of recent Fed chairs, and on and on, have always “questioned the credibility of the Fed”. That’s not what I mean. I mean that if Trump were to remove Powell as chair in retaliation for rate hikes, it would prompt the market to actually question the viability of the Federal Reserve. Trump would be undermining the institution that controls the world’s reserve currency. It is an almost unfathomable prospect and speaks to just how much damage an idiot can do when the “bravest” members of his party choose appeasement and the cowards (i.e., most Republicans) succumb to the personality cult.
According to Bloomberg, Trump’s advisers “are hoping” that Trump will forget about this “over the holidays”. In other words, the President’s aides are now counting on Mar-a-Lago to save Jerome Powell, but with the government now shuttered thanks to Trump’s “steel slat barrier” demands, he’s likely to get even angrier, especially if the market continues to crash.
How many times did you read over the past four months that Trump “can’t” oust Powell? And do you remember what I tried to tell you about that? If not, here’s a reminder from a post published in late August:
This is right out of a banana republic. Donald Trump is running deficit-funded fiscal stimulus at a time when the economy is already overheating and he’s demanding lower interest rates in increasingly abrasive terms while simultaneously cracking down on dissent by, among other things, stripping former intelligence officials of their security clearances, stripping career civil servants of their pensions for criticizing him, threatening antitrust action against companies in retaliation for bad press, and on, and on, and on.
The writing is on the wall.
The idea that Trump is going to sit idly by while Jerome Powell drives the policy divergence with America’s trade partners ever wider on the way to pushing the dollar higher and, by extension, fighting China and Europe’s trade battles for them, is silly.
Suddenly, former traders and FX analysts have become political scientists and historians on the way to making claims about what Trump “can”, “can’t” and “won’t” do, when it comes to the Fed. Well sorry guys and gals, that’s not your area of expertise. Trump will try to overstep if he runs out of other options.
The title of that post: “Do Not Underestimate Donald Trump When It Comes To The Fed”
As I reminded everyone then, Trump can remove Powell “for cause” and Bloomberg says as much on Saturday (they’ve been over this before in their pieces, but now it’s becoming a bit more serious):
The Federal Reserve Act says governors may be ‘removed for cause by the President’ [and] since the chairman is also a governor, that presumably extends to him or her. But the rules around firing the leader are legally ambiguous.
Right. And see, that is the perfect setup for Trump. The statute explicitly says Fed governors can be removed, but the rest of it is open to interpretation.
That is an autocrat’s dream come true. He has the power to do it, but the process isn’t well articulated, leaving the executive free to literally write the precedent.