Edward Lotterman
President Donald Trump is angry with Federal Reserve Chair Jerome Powell.
In comments made in Chicago Wednesday, Powell had the temerity to suggest that Trump’s tariffs might have negative economic impacts to which the Fed may have to respond.
Among other things, Powell said higher tariffs could increase inflation and lower output and employment. Additionally, he questioned the GOP belief that cuts can be made in discretionary spending that are large enough to close chronic budget deficits. They aren’t.
All these statements directly counter what Trump asserts. He responded with insults and said, “Powell’s termination cannot come fast enough!”
As he usually does, Trump views contradiction as a personal challenge like an armored knight throwing down a gauntlet daring a rival to fight. In this case, however, this is a mistake, and if the president starts a campaign to dominate the Fed he is doomed to fail in the long run.
The architects of our central bank put years of effort into creating an institution completely insulated from political control. Trump can kick back against that wall all he wants, or beat his head against it for that matter, but he won’t succeed.
Powell is not a lone knight looking for a fight. He is a quiet but resolute sheriff with a strong posse behind him. And they enjoy multiple defensive advantages.
First, consider the defenses that have developed spontaneously — and naturally — over time, by market forces and not from legislation. The U.S. dollar remains the most important currency in the world. Our private-sector capital markets are by far the largest, most liquid in the world, with the best legal protections and a history of freedom from political meddling.
If an ignorant, inept and impulsive president ruins these reputations developed over a century and a half, bond markets here and elsewhere will be thrown into a tailspin. These are natural forces akin to the tides and the sunrise. Trump may be heedless of this, but key aides understand the peril to his presidency and our economy. Even after stabilization, the U.S. would never recover its reputation for safety and soundness that we still have.
Secondly, even if Trump plunges ahead against wise counsel, ousting even a lame duck chair like Powell will not be easy. The law is on the side of the Fed. The Board of Governors, backed by the 12 independent private-corporation Fed district banks marshal a lot of legal firepower. None are subject to the control of the president or attorney general. Individually, or as a group, there is no question that these banks would have legal standing to challenge an attack on the long-established status of the Fed system as a whole.
Moreover, despite some journalistic and public beliefs to the contrary, the Fed Chair is not a dictator. He is one of seven governors. He is their chair, not president or commander. Moreover, the Board of Governors does not control money supply and interest rate decisions by itself. Management of these policy instruments, by intentional design to deter just what Trump threatens, falls to the Federal Open Market Committee. That includes the seven governors plus five of the 12 district presidents in an annual rotation. These are private-sector roles immune from firing or pressure from any politician. And they are fiercely protective of that autonomy. This system of fragmented authority was created for situations just like the present.
Yes, the FOMC usually does vote for the policy suggested by the chair, with only one or two dissents at most. But that is not from blind obedience. Rather, it is that a competent chair never advances a policy move for which they do not have enough votes.
Consider even the worst-case scenario: Trump ignores federal court orders affirming Powell’s protection against being fired over policy disagreements; federal marshals, under Trump’s order, force their way past the Board of Governors’ own guards to physically drag Powell off the premises. But having done that, there would still be six governors. Remove all those and five district presidents would remain. There is no way they could be excluded without a major revision of the Federal Reserve Act. By then, the world financial system would be in a freefall as bad as 1929. Even with an acquiescent Congress and courts, Trump might win skirmishes, but he cannot win a major battle nor the war. Markets will win out in the end.
Now, what about Powell’s assertions in his Chicago speech? Is he out of line in making them? Are they true or false?
Appropriateness of comments by a Fed official is not a trivial issue. An unwritten ethic in the past was that Fed Board members should not voice opinions on matters outside of monetary policy or the banking system. When Fed Chair Alan Greenspan cautiously testified for President George W. Bush 2001 tax cut, he was criticized by some.
That ethic has broken down, however. Moreover, in meeting the Fed’s statutory mandate to maintain “maximum employment” and “stable prices,” Fed leaders must evaluate all relevant factors. Ditto for its roles as a financial system regulator and lender of last resort. They need reliable appraisals of current economic conditions. And they should explain reasons for policy decisions to the general public and not only after the fact. Powell was not out of line.
Are these Fed views on issues of tariffs, taxes and spending correct? If you asked a few thousand private-sector economists if the new tariffs were likely to boost inflation, an overwhelming majority would say “yes!” There would be a similar response on their potential to reduce output and employment. Trump cannot fire them all.
If asked, “Can federal budget deficits be closed by reductions in discretionary spending?” responses would be a resounding “No!” — although there would be considerably different views on alternatives that might be successful.
Be prepared for this to blow up into Trump’s biggest legal confrontation so far.
Unless Trump’s advisers can convince him to avoid a battle he cannot win, there will be protracted tension. None of this will be good for the U.S. or world economies, but longer run outcomes are of little importance to Trump. His mentor Roy Cohn taught him to just hit back reflexively, without long-term strategizing. That won’t work in this case.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
