Jerome Powell, governor of the U.S. Federal Reserve and President Donald Trump at the Rose Garden of the White House in Washington, D.C. (Photographer: Olivier Douliery/Bloomberg)

Trump-Powell Battle Would Span Three Arenas Where Everyone Loses

(Bloomberg) -- Donald Trump says he likes winning. Right now, it’s difficult to count up anything but losers if the president fires Federal Reserve Chairman Jerome Powell.

Trump has been discussing whether he can dismiss Powell, Bloomberg News reported late Friday, prompting Treasury Secretary Steven Mnuchin to tweet on Saturday that the president said he doesn’t believe he has the authority to do so. White House Budget Director Mick Mulvaney on Sunday echoed that line. Trump himself has been publicly silent on the Fed since the Bloomberg News report.

Trump-Powell Battle Would Span Three Arenas Where Everyone Loses

If he decides to push ahead anyway, the president will be up against powerful forces that will likely deliver unwelcome verdicts in three principal arenas: the financial markets and economy, the U.S. Senate and the courts.

Here is how the might play out in each venue:

1. The Markets and Economy

Firing Powell could undermine the U.S. currency, leading to higher longer-term interest rates as foreign investors who are critical to financing America’s growing deficit balk, said Mark Spindel, the head of Potomac River Capital, a Washington investment fund.

Anyone buying a house, or businesses attempting to finance capital spending, will pay the cost. Dollar volatility could infect the stock market, with investors further retreating from risk.

“I can’t think of one U.S. asset you would want to own,’’ said Spindel, co-author of a book on the Fed’s relationship with Congress. “Where is the president helped by any of this?’’

Trump has been simmering for months over Fed policy, claiming rising interest rates are putting a brake on his economic plans, though many companies have cited the trade war as negatively impacting business.

Fed officials, and investors for the most part, have taken Trump’s Fed criticism in stride, with some analysts viewing it as a way for the president to assign blame for falling stock markets. But this past week something tipped.

Trump-Powell Battle Would Span Three Arenas Where Everyone Loses

On Wednesday, Fed officials raised the benchmark lending rate a quarter point because they have a strong economic outlook for 2019. That decision was unanimous, with all of Trump’s Fed Board appointees and the five reserve bank presidents, who aren’t politically appointed, casting a vote in favor. Policy makers also released forecasts showing they expect to hike borrowing costs twice in 2019.

Yet stocks tumbled further amid confusion over the Fed’s message and a separate fight over a government shutdown.

The irony is that if Trump does try to fire Powell, and that caused enough financial-market damage, it could erode the central bank’s economic outlook and hit growth and hiring. In that case, policy makers might have to pause their rate hikes.

From that point, it’s a matter of who the public blames for the slowdown: Trump or the Fed.

“Firing the Fed Chairman over one quarter-point move, with real economic data as strong as they have been, would be utter madness and highly counterproductive,’’ said Jeffrey Lacker, a former Richmond Fed president who is now a professor at Virginia Commonwealth University. “It’s hard to see anything more likely to tip us into a recession right now.”

Michael Bordo, a Fed historian and professor at Rutgers University, said appointees to the Fed have typically aligned with the political and economic paradigms of the president. But challenges to the Fed’s leadership could swing some of the dovish members to the hawkish side, he said. Ultimately, the president’s influence is limited.

“The president can try and fire the chairman but he can’t change the whole Federal Reserve because he is not responsible for its creation,’’ Bordo said.

What Our Economists Says

“First and foremost, such an unprecedented move will not be in the best interest of the president himself, as it will create havoc in the markets. The magnitude of the market slump is hard to predict, but presumably it could make the market reaction to the latest Fed move look benign.”

- Yelena Shulyatyeva, Bloomberg Economics

2. The Senate

That gets to the second arena, which involves the Senate, which confirmed Powell and, together with the House, presides over the Federal Reserve Act.

It isn’t clear that the Senate would blithely accept Trump’s wishes and rubber stamp a new chairman.

“The norm that you don’t fire a Fed Chair is as strong as they come,” said Peter Conti-Brown, a central bank historian at The University of Pennsylvania’s Wharton School.

Right now there is plenty of resistance among Senate Republicans on other Trump policies.

“All we need are four Republican senators,” he said. Republicans will hold 53 Senate seats when the new Congress takes over next month. By making clear that they would not confirm a successor, senators could kill the President’s attempt at replacing Powell.

Alabama Republican Senator Richard Shelby, a former chairman of the Senate Banking Committee, publicly warned Trump against the move on Saturday after Bloomberg reported the discussions. “I’d be very careful about doing that,” Shelby said. “The independence of the Fed is foundation of our banking system.”

Powell could stay on as a governor and be elected Federal Open Market Committee chair even if the president removed him as Fed Board chair, because the two positions are distinct, Conti-Brown said.

The FOMC, the Fed panel that sets interest rates, could even elect a non-politically appointed Fed bank president as chair.

Former New York Fed President William Dudley doesn’t think Trump would try to remove Powell, but if he would, “my advice to him -- I would stay on as a Governor,” if that’s legally possible. ‘You have to protect the institution,” said Dudley, who retired in June.

3. The Courts

The third arena involves the legal battle over removal. Firing the chairman just doesn’t look that easy from a legal perspective.

The Federal Reserve Act stipulates that the president can only remove a Fed governor -- and Powell is also a governor -- “for cause,” a reason that typically doesn’t cover policy differences. Powell’s Senate confirmation and fixed terms provide more protection; in other cases they’ve been interpreted by the courts as limiting the president’s authority to dismiss his own appointments in order to grant an agency greater independence.

Then there’s the question of who Trump might have in mind to replace Powell.

“The people I would be afraid of: people with no monetary policy experience but an allegiance to the President,” Conti-Brown said. “I’m not sure who is confirmable,” he said. “My advice to the Senate is no one should be.”

©2018 Bloomberg L.P.