Trump is trying to intimidate the Fed, again

Once again Donald Trump is politicising the US Federal Reserve Board, accusing the chair of the world’s most important and powerful central bank of planning to cut US interest rates to improve Joe Biden’s prospects of being re-elected.

In an interview on Fox Business Network on Friday, Trump accused the Fed’s chair, Jerome Powell of being “political,” saying that he thought Powell was going to do something to “probably help the Democrats.”

Trump’s comments come at a sensitive and delicate moment for the Fed.
Trump’s comments come at a sensitive and delicate moment for the Fed.Credit: AP

“It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected, I don’t know.”

He also said that, when Powell’s term as Fed chair expires in 2026, he wouldn’t, if he were president, reappoint him.

Trump’s comments come at a sensitive and delicate moment for the Fed, which is on the cusp of cutting rates for the first time in two years.

While Friday’s unexpectedly strong employment data – the US economy added nearly twice as many jobs (353,)) in January as had been forecast – complicates its decision-making and probably defers the first of the expected rate cuts from March to May, recent commentary from the Fed and from Powell has made it clear that the bank expects to make several rate cuts this year.

The most recent Fed projection is for three cuts. The market had been pricing in as many as five or six, although the buoyant jobs market data might pull those expectations back somewhat.

In any election year, the Fed’s decision-making is politically sensitive. Given how toxic US politics is in the lead-up to this year’s election in November and Trump’s plans to gut the US civil service and restock it with MAGA loyalists if he wins, the pressure on the Fed is more intense than ever.

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Trump seems to think that any move by the Fed to lower US interest rates, or even its signalling of their likelihood, is designed to help Biden win re-election. The Fed, however, would realise that leaving real interest rates increasingly elevated for too long – as the inflation rate keeps falling real rates are effectively rising – could choke off what has been strong economic growth.

Instead of the soft landing which appears within reach, with unemployment historically low and economic growth solid with now relatively low inflation, the Fed could inadvertently steer the US economy onto the rocks.

Fed chair Jerome Powell has been a frequent target of Trump.
Fed chair Jerome Powell has been a frequent target of Trump.Credit: Bloomberg

Powell, in similar circumstances in 2018 and 2019, during the Trump presidency, stared down similar attacks from Trump, who was anxious to lower rates ahead of the 2020 election to boost a slowing economy.

Trump threatened to sack Powell, who he had appointed, actively exploring how it might be done. He tried, unsuccessfully, to stack the Fed’s board with controversial nominees with such dubious qualifications that they failed to gain Senate ratification.

Powell’s current term as the Fed’s chair expires in May 2026, although his term as a governor of the Fed (as opposed to its chair) doesn’t end until January 2028.

Trump could, if he were president, end Powell’s chairmanship in 2026 but would find it difficult to remove him from the board.

Given that it is the members of the powerful Open Market Committee (FOMC) who appoint the chair of the body that actually makes monetary policy decisions, he wouldn’t be able to prevent the board from retaining Powell as chair of the FOMC and being the face and voice of monetary policy decisions.

Trump discovered, during his last term, that the US president doesn’t have the power to sack a Fed chair or member of the Fed’s board of governors for anything other than “cause,” which is generally interpreted to mean there is some evidence of inefficiency, neglect of duty or malfeasance while in the post. It is doubtful that differences over monetary policy would meet that criteria.

It would matter, and not just for the US, if the Fed were seen to be intimidated by Trump – or actively trying to help Biden – and even more if Trump were to win the presidency and stack the board with people who would do his bidding.

The Fed’s credibility, like those of other central banks, rests on its perceived independence from politicians.

If the Fed were seen to be acting in a partisan manner, it would have material implications for financial markets and economies elsewhere.
If the Fed were seen to be acting in a partisan manner, it would have material implications for financial markets and economies elsewhere.Credit: Reuters

It needs to be seen to be responding to the economic conditions of the day, seeking stable long-term growth, rather than aligning its decision-making to the political cycle and politicians’ ambitions.

Given the significance of the US economy and its financial markets – particularly the rate-sensitive bond market and US dollar – to the global economy and financial system, the independence of the Fed is not just an issue for America and Americans but for the rest of the world.

If the Fed were seen to be acting in a partisan manner, it would have material implications for financial markets and economies elsewhere. Investors, and policymakers, need a level of trust that the Fed is acting independently and that there is a degree of predictability to decision-making driven by the economics, not the politics.

For Powell and his fellow governors, this was always going to be a difficult year to navigate even without the politics.

Instead of the soft landing which appears within reach, with unemployment historically low and economic growth solid with now relatively low inflation, the Fed could inadvertently steer the US economy onto the rocks.

It will be attacked by Trump and Republicans if it does cut US rates and by Democrats, nervous that Trump might succeed in intimidating the Fed to act more cautiously than it might otherwise act, if it doesn’t or if it cuts them more slowly or by less than it might otherwise have done.

Late last year when quizzed about the coincidence of the expected shift in monetary policy this year with the election campaigns, Powell said that “the minute we start thinking about those things….we can’t.”

At his press conference last week (after a FOMC meeting that, as expected, left rates unchanged) Powell said this year would be “highly consequential” for the bank and for monetary policy and that the Fed was “very buckled down and focused on doing our jobs.”

There have been precedents for the Fed raising or lowering interest rates during election years, most recently in 2020 when it cut rates to essentially zero and embarked on a massive bond-buying program as the pandemic threatened to decimate the economy. In 2004, it raised rates even as George W. Bush sought re-election.

There’s no reason to think this year will be any different.

The political sensitivities might make the Fed a little more wary and will create pressure to make sure it provides convincing explanation for whatever it does or doesn’t do but Powell’s history as chair and of the board that he leads says that they will try to do what they think is best for the economy, not Trump or Biden’s electoral prospects. As they should.

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Source: Thanks smh.com