When Minneapolis Federal Reserve President Neel Kashkari wrote an op-ed in The Wall Street Journal late last month questioning the US Federal Reserve consensus about interest rate increases, it was so defiant that more than one commentator wondered if he was angling for Jerome Powell’s job as Fed chair.
This could well have been written by US President Donald Trump himself, who has been complaining loudly and often how much Powell’s policy bothers him because it threatens ‘his economy.’ His criticism has been so vociferous and unruly, it has raised the question of whether he would, or could, fire Powell and replace him with someone more accommodating, in every sense of the word. For instance, Neel Kashkari.
Kashkari, a one-time protégé of Treasury Secretary Henry Paulson (2006-09) and head of the bank bailout programme during the financial crisis, has been an interest-rate dove and a regulatory hawk since taking over the ninth district regional bank in the Fed system in 2016.
He is a member of the policy-making federal open market committee and takes part in all its meetings. But, like most of the regional bank presidents, he rotates into a voting position only once every three years – in 2017 and again in 2020.
In his largely critical WSJ piece, Kashkari asserted that in the absence of inflationary pressure regarding its symmetric 2% inflation target, the Fed should pause its rate increases long enough to see if the current 2-2.5% benchmark is that elusive neutral rate which neither stimulates nor dampens the economy.
He further contended that halting rate increases would enable the Fed to see whether the nearly six million people of working age missing from the labour force since 2006 would return if the economy is allowed to steam along at full speed.
In fact, a growing number of economists are wondering the same thing. Last month in its influential ‘Up and down Wall Street’ column, investment publication Barron’s published an article titled, ‘Why Trump may be right about the Fed’. It argued that current tensions, from Chinese trade, to Italian budgets, to Saudi Arabian murder plots – and perhaps Fed tightening – are already slowing down the economy and dampening inflation.
Even if a December rate increase is already baked in, futures markets have now backed off somewhat from further action in 2019, forecasting only one rate increase instead of three.
The dilemma for the Fed is that even if the FOMC did want to slow down or suspend the rate increases, they don’t want to be seen buckling under to the president. The Fed has sought to defend its hard-won independence since the 1951 Treasury-Fed accord freed the central bank from the tutelage of the government.
During the second world war and immediately afterwards, the Treasury controlled the Fed and dictated rate caps in accord with government policy. When the first Fed chair, Marriner Eccles (1934-48), tried to break with that and defy US President Harry S. Truman (1945-53), the latter refused to appoint him in 1948 to another four-year term as chair. Undeterred, Eccles remained on the board of governors until 1951 as a simple member.
Which brings us back to Trump and Powell. The 1935 Banking Act, which redesigned the Fed, allows the president to remove Fed governors ‘for cause,’ a vague phrase that has never been tested and ties legal experts up in knots, but is understood generally not to include disagreements over policy.
Even vaguer is the president’s power with regard to designating the chairman. Is it possible for the president to demote the chairman back to being just a governor, not infringing on his appointment to that post and its legal entitlements?
Trump has deliberately portrayed himself as a disruptor and has on numerous occasions gone against settled Washington protocol, though rarely actually testing his actions in court. On the other hand, he has made an art of bluster, which at the least throws his opponents off balance and at best bullies them into bowing to his will.
Sometimes that bluster is just pandering to his base and goes no further. But occasionally it does. He whined and raged against US Attorney General Jeff Sessions for months without taking action, only to fire him the day after midterm elections.
Even if Trump were to fire Powell as chair and get away with it, it’s extremely unlikely Khashkari would be the one to take his place. Though he has been a Republican all his life and even mounted a quixotic campaign for governor of California, his regulatory stance alone would make Senate confirmation – first to the board of governors and then to chair – very difficult.
Truman’s action against Eccles eventually backfired and resulted in the 1951 accord. Other attempts to pressure the Fed may have been more successful.
The Nixon Tapes, for instance, revealed that President Richard Nixon (1969-74) pressured then-Fed chair Arthur Burns to keep monetary policy loose ahead of his re-election effort in 1972. Burns did, though whether due to presidential pressure or conviction, we will never know for sure.
Therein lies the rub. Even if Powell begins to have his doubts about current policy, how able would he be to change course without appearing weak? Moreover, in the post-Volcker Fed there is an institutional bias in favour of early and frequent rate increases, and a non-economist like Powell might find it hard to argue with staff suggestions to keep pushing on rates, no matter what Kashkari says at the FOMC meetings.
Kashkhari may not be alone, however. Philadelphia Fed chief Patrick Harker recently questioned whether the December rate increase would be prudent and Atlanta Fed President Raphael Bostic felt the Fed is very near the neutral rate.
Ironically, Trump might have been better off keeping Janet Yellen as chair. As a knee-jerk dove and a highly regarded economist, she would have had the flexibility and independence to change course if she read the same signs as Kashkari and others. The lesson might be he needs to be careful about kicking out Fed chairs.
Darrell Delamaide is US editor at OMFIF.