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Analysis
Trump stuck with Powell despite strains

Trump stuck with Powell despite strains

Historically tricky relations between US presidents and Fed chiefs

by Darrell Delamaide in Washington

Thu 22 Nov 2018

Minneapolis Federal Reserve President Neel Kashkari's defiance on the Fed's interest rate increases has made commentators wonder if he was angling for Jerome Powell's job as Fed chair.

Kashkari's broadside in a Wall Street Journal article late last month could well have been written by Donald Trump himself. The US president has been complaining loudly and often how much Powell's policy bothers him because it threatens 'his economy.' 

His criticism has been so vociferous it has raised the question of whether he could replace Powell with someone more accommodating, in every sense of the word. For instance, Neel Kashkari.

In practice, the president's freedom of action in firing a Fed chief is so highly constrained as to be practically non-existent. He may be trying to get his way, as so often, by bluster. Depending on the steeliness of Powell and his Fed colleagues, that may prove counter-productive.

Trump might be thinking he should have kept on Janet Yellen as chair instead of asking her to step down when her four-year term ended at the beginning of February. Yellen wanted to stay on and her job interview with Trump late last year went moderately well – but by then Trump had already set his mind on replacing her. As an instinctive 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 Co.

Kashkari 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 the 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 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.

Kashkhari may not be alone. 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.

Even if a December increase is already baked in, futures markets have now backed off somewhat from further action in 2019, forecasting only one 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 well-established Fed chair, Marriner Eccles, 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.

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 generally understood 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, 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.

Even if Trump were to fire Powell as chair, Khashkari would be unlikely to take his place. 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.

Even if Powell begins to have his doubts about current policy, his ability to change course without appearing weak would be limited.

Moreover, since the late 1980s the Fed has shown 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.

Even Trump has to be constrained by history and practice. The lesson is: he needs to be careful about kicking out Fed chairs.

Darrell Delamaide is US editor at OMFIF.

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