What Trump Can (and Can’t) Do to Steer Fed Policy

(Bloomberg) -- President Donald Trump is unhappy that the U.S. Federal Reserve under the chairman he chose, Jerome Powell, raised interest rates. But while the president can order 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 a series of tweets, interviews and off-the-cuff remarks that break with recent precedent among occupants of the White House, Trump has accused the Fed of "unnecessary and destructive actions." Had it not "mistakenly raised interest rates," he tweeted on March 29, U.S. gross domestic product and stock prices "would have both been much higher." He’s called the Fed "the only problem our economy has" and "a much bigger problem than China" and said he’s "not even a little bit happy with with my selection" of Powell as chairman. After nine increases since 2015, the last seven during his presidency, Trump wants the Fed to reduce interest rates and resume buying government securities to increase the money supply, the stimulative activity known as quantitative easing.

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 how to pursue 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?

He can complain publicly, as Trump has done routinely, breaking a roughly 25-year span of presidents generally not commenting on Fed policy. Or he can air his complaints in person, perhaps with some physical intimidation, as Lyndon Johnson is said to have done 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. Trump has two more seats to fill and by all indications is now seeking true believers who will fight for his point of view. The two names he’s floated are Stephen Moore, an adviser to Trump’s 2016 presidential campaign and a distinguished visiting fellow at the conservative Heritage Foundation, and Herman Cain, the former chief executive officer of Godfather’s Pizza and onetime chairman of the Federal Reserve Bank of Kansas City who co-founded a pro-Trump political action committee. One hurdle: Any Fed nominee needs to win Senate confirmation.

5. Do a president’s picks do as he wants?

No, as Trump himself can attest. There have been no dissenting votes on any of the Fed’s nine interest-rate decisions under Powell, and no sitting Fed officials are calling for rate cuts. The Fed makes decision by consensus, and comments from Trump’s appointees 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.

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

• 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.”
• Trump’s attacks on Powell actually help the Fed, Karl W. Smith argues in Bloomberg Opinion.

--With assistance from Christopher Condon.

To contact the reporters on this story: Matthew Boesler in New York at mboesler1@bloomberg.net;Laurence Arnold in Washington at larnold4@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, John O'Neil

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