What Trump Can (And Can’t) Do to Steer Fed Policy: QuickTake
Why is Trump unhappy with the Fed?
(Bloomberg) -- President Donald Trump remains unhappy that the U.S. Federal Reserve under the chairman he chose, Jerome Powell, raised interest rates during the first part of his presidency and more recently hasn’t dramatically lowered them. But while the president can authorize military operations, issue rules by executive order, convene Congress and pardon criminals, he can’t do much about the Fed. That doesn’t mean Trump isn’t trying.
1. Why is Trump unhappy with the Fed?
In tweets, interviews and off-the-cuff remarks throughout 2019 that broke with recent precedent among occupants of the White House, Trump accused the Fed of “unnecessary and destructive actions.” The Fed raised the benchmark federal funds rate nine times starting in 2015, the last seven during Trump’s presidency, reasoning that inflation had become a bigger threat than unemployment. Had the Fed not “mistakenly raised interest rates,” Trump tweeted in March 2019, U.S. gross domestic product and stock prices “would have both been much higher.” Since August, the Fed has lowered rates three times, but Trump says even that’s not a sufficient boost to growth. The Fed should “get our interest rates down to ZERO, or less,” Trump said in a September 2019 tweet.
2. Why can’t Trump tell the Fed what to do?
Unlike the Cabinet secretaries who serve at the president’s pleasure, the central bank is an operationally independent agency, answerable to Congress on its goals but traditionally afforded leeway in pursuing them. The president has no sign-off on interest-rate decisions or other Fed policy. This is in line with the autonomy central banks are afforded throughout the developed world.
3. What can a president do, then?
Complain publicly, as Trump does, breaking a roughly 25-year span of presidents generally not commenting on Fed policy. Or air his complaints in person and with intimidation, as Lyndon Johnson did to Fed Chairman William McChesney Martin in 1965. The president’s most direct power is to choose the people who serve on the Federal Reserve’s Board of Governors and who vote on changes to interest rates.
4. Will Trump appoint Fed governors who share his views?
Actually, four of the seven board seats are already filled by Trump appointees: Powell, the chairman, plus Randal Quarles, Richard Clarida and Michelle Bowman. With two more seats to fill, Trump has nominated two economists, Christopher Waller and Judy Shelton, thought likely to enthusiastically support his call for lower interest rates. Shelton in particular has raised eyebrows: A former economic adviser to Trump’s presidential campaign, she abandoned her previously hawkish views on inflation -- views counter to Trump’s -- after becoming a candidate for a Fed nomination. Trump earlier had wanted to appoint Stephen Moore, an adviser to his 2016 campaign and a distinguished visiting fellow at the conservative Heritage Foundation, and Herman Cain, the former chief executive officer of Godfather’s Pizza who co-founded a pro-Trump political action committee. But Moore and Cain both withdrew after it became clear they lacked support in the U.S. Senate, which has the power to confirm or reject the president’s picks for the Fed.
5. Do a president’s picks do as he wants?
No, as Trump himself can attest. There were no dissenting votes on any of the Fed’s four interest-rate hikes under Powell. The Fed makes decisions by consensus, and comments from Trump’s appointees who have already been confirmed suggest that they’re generally in line with the status quo.
6. Can the president fire Fed governors?
The Federal Reserve Act says governors may be “removed for cause” by the president, which generally has been taken to mean “inefficiency, neglect of duty or malfeasance,” as Peter Conti-Brown of the University of Pennsylvania notes in his book on Fed independence. Another area of ambiguity is whether different standards apply to firing the chairman, who simultaneously holds a 14-year appointment as governor and a separate four-year term as chairman. Bloomberg News reported that Trump discussed firing Powell in late 2018 and later asked White House lawyers to explore options for removing him as Fed chairman. Trump denied that he’d threatened to demote Powell back to a board governor -- Powell’s term on the board runs until 2028 -- but said he’d “be able to do that if I wanted.” Powell has said that he intends to serve his full four-year term at the helm of the Fed.
7. Has this been tested?
No Fed chief in the modern era has been removed for cause, though President Harry Truman’s public battle with Fed Chairman Thomas McCabe over interest rates (which Truman wanted to keep low) got so intense that McCabe resigned. Powell has indicated he’d resist any effort by Trump to fire him.
The Reference Shelf
- Trump is short on tools to amp up economic growth before November’s election.
- A QuickTake explainer on central bank independence around the world.
- The Federal Reserve Bank of Kansas City published a history, “The Balance of Power: The Political Fight for an Independent Central Bank, 1790-Present.”
- Fed chair Jerome Powell told U.S. senators at his confirmation hearing that he would preserve the bank’s “independent and nonpartisan status.”
- Shelton and Waller, if confirmed, can be counted on to push for lower interest rates, writes Bloomberg Opinion columnist Narayana Kocherlakota.
--With assistance from Christopher Condon.
To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net
To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Laurence Arnold, Alister Bull
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