Continuing this lovely little series (#733580, #752441) after a little, um, political/electoral hiccup (#757365) —everyone's attention was elsewhere.
...but maybe we can marry the two themes, politics + monetary economics = love.
In the Fed press conference yesterday, Chairman Powell was asked whether he’d step aside if Trump asked/demanded he did.
“No.”
…followed by an awkward silence. After a follow-up question he clarified that it was “not permitted under the law.”
Powell seemed pretty annoyed. He is usually much more relaxed and open even to stupid journalist questions. Here he was unusually direct, short, and I even sensed a tinge of frustration and defiance. (That’s probably why every outlet from CNN to BBC in addition to the financial outlets picked up on it and reported it broadly.)
Look, I’m a money guy—I have no knowledge of law and can’t speak to the legal options for Trump to somehow get rid of Powell. My understanding is that he probably can’t fire Powell or oust him from the Federal Reserve Board. Perhaps, maybe, there’s a way to demote him, BUT, since there are no vacancies on the board for a few more years, Trump would have to nominate a chair from one of the current board members—achieving the sum total of nothing in terms of influence over Fed decisions.
These ideas have been circulating for a while. WSJ reported in April 1:
“The group also contends that Trump, if he returns to the White House, would have the authority to oust Jerome Powell as Fed chair before his four-year term ends in 2026, the people familiar with the matter said, though Powell would likely remain on the Fed’s board of governors.“
So, WTH is Fed "independence"?
Simply put, it’s the idea of checks-and-balances and insulating monetary decisions from executive/legislative ones.
All that independence means is there are no formal levers the president can pull to have the Fed make different policy decisions. For all the criticism we may levy at the Fed and its existence, a monetary spigot directly controlled by the executive is worse. (Google “political business cycle,” but I wager most Stackers have a pretty good idea of what this entails in terms of short-term juicing up an economy before an election 2)
Practically, Fed independence is enshrined by:
- not having a budget from Congress (Fed finances itself from seigniorage, a fancy word for the profits from money printing 3)
- its board members and chairman having long, fixed-length appointments (Powell’s chairmanship ends in 2026)
- Importantly, president can’t just fire such a member.
What independence doesn’t mean is that the monetary and fiscal/executive powers never agree, never address the same realities, never react to one another, are never on a call or in a meeting. Those things are inevitable. The Fed chair also routinely reports to Congress twice a year and gets barraged questions from Representatives in the House.
In Bitcoin circles, Fed/Treasury get a lot of slack for “faux independence.” Now, while the Fed isn’t explicitly operating on Treasury orders or sucking up to the president, if two people make choices independently of one another but are exposed to the same information and, more importantly, a similar set of values or worldview, is it so strange that they come to similar conclusions?
Now, if we move past “independence” narrowly—can Presidents lean on Fed chairs, pester them in public or contact them in private to make their sentiments known? Indeed. Many presidents have done so, not least the very same Trump on the very same Powell in 2017 and 2018. (Powell didn’t budge back then, either, so I imagine he’s a little tired of this prospective déjà vu.)
Precedent? Plenty.
In 1951, President Truman kind of fired the sitting Fed chair, telling him in no uncertain terms that his services weren’t “satisfactory” 4. Instead of resisting, which Thomas McCabe legally probably could have done, he resigned.
Another well-known Fed independence lore is LBJ in the 1960s, who had the then-Chair of the Fed, William McChesney Martin, flown down to his Texas ranch and lambasted about the Fed’s too-hawkish stance—and apparently physically assaulted him. Changed the policy outcomes? Maybe a little.
It’s hard to imagine Powell acquiescing to something similar, changing policymaking on soft threats or voluntarily stepping aside from loud Trumpian bullying. ESPECIALLY since we’ve already been through one round of that, when Trump went after Powell publicly to no or little effect.
Tl;dr: Under current monetary regimes, Fed independence is pretty important, and Trump probably doesn’t have a way to make a dent in that.
That's today's little money lesson.
Peace,
J