President Trump tweeted on Friday that Jerome H. Powell, chair of the Federal Reserve, might be a bigger enemy of the United States than China’s president because the Fed has refused Trump’s demand to lower interest rates significantly. The president said that the high cost of borrowing hurts the U.S. economy.
We answer your questions about this exchange.
1. Have presidents attacked the Fed using such aggressive tactics and rhetoric?
Yes and no. Presidents have often pressured the Federal Reserve to keep interest rates low to juice the economy. But Trump is the first since President Lyndon B. Johnson in the mid-1960s to run an aggressive, year-long campaign to demonize his hand-selected central banker. Past presidents have pushed their Fed chairs when the economy was in the dumps, facing high inflation, unemployment or both. But today, unemployment is near an all-time low, and inflation is below the Fed’s 2 percent target.
Here’s the issue: Trump’s trade war — particularly his on-again, off-again tariffs — has dented business confidence and could push the economy into a recession. To forestall that, he wants the Fed to lower rates. The Fed did cut rates last month but remains divided on whether to lower rates again.
2. Do presidents succeed when they pressure the Fed?
Sometimes. In 1951, President Harry S. Truman commanded the Fed not to raise rates. When Fed chair Marriner Eccles refused, lawmakers came to the Fed’s defense and helped force the administration to back down, as we show in our book “The Myth of Independence.”
Then again, consider Johnson, who in 1965 literally took Fed chair William McChesney Martin to the woodshed at his ranch to demand the Fed keep rates low. “Boys are dying in Vietnam,” Johnson reportedly screamed, and you “don’t care.”
Martin initially frustrated Johnson by orchestrating a rate hike. But presidents Johnson and Nixon succeeded in pushing successive Fed chairs to keep interest rates too low. The result? Historic levels of inflation and unemployment in the late 1960s and throughout the 1970s.
3. Trump appointed Powell as chair. Can't he just fire him?
Trump wants a roaring economy to help secure his reelection. Like most politicians, he is blaming the Fed for anything short of a boom. So the rising risks of recession threaten his reelection. That’s especially problematic for Trump, since his public approval has never cracked 50 percent — though the public gives him higher marks for the economy.
During Powell’s first year as chair in 2018, the Fed raised rates four times. When the Fed stopped increasing rates in early 2019, Trump still got mad because it didn’t cut rates. And when the Fed finally lowered rates by a quarter-point in the summer, Trump demanded a full 1 percent reduction.
Why doesn’t Trump just fire Powell? Trump claims he has the authority to do so. Powell disagrees and says he won’t leave office, even if dismissed. The relevant law is murkier. The Senate confirmed Powell to a four-year term as chair in addition to a 14-year term as governor. The law says that governors can only be fired “for cause,” and courts don’t typically construe policy differences as “cause.”
So the president probably can’t remove Powell from the Fed board — but can he demote him from the chairmanship? Congress did not say when it revised the Federal Reserve Act to require the Senate to confirm the chair. Were Trump to try, the matter could land in the courts. But a dismissal — with Powell refusing to leave — would roil markets and the economy, too.
4. Isn’t the Fed independent?
Institutionally, the Fed is insulated from the rest of the government. Its funds come not from Congress but from its own operations; Fed governors have extraordinary long terms; and so forth.
But as the most important economic policymaker in the world, the Fed faces pressures from presidents, lawmakers, the public and global markets. Trump’s attacks raise existential questions: How can (and should) the Fed balance competing political pressures against what central bankers see as the right monetary policy choices?
The Fed can’t risk getting out of step with the public or with lawmakers — because Congress can revise the Federal Reserve Act to change the Fed’s mandate, its powers or its responsibilities. Neither can the Fed ignore the president since his statements, tweets and policies help shape fiscal policy and investor expectations, which affect the health of the economy. And with a congressional mandate to deliver full employment and stable prices, the Fed hardly operates independently of other political actors.
5. How might the Federal Reserve respond to Trump's pressure?
Fed officials invariably claim they do not consider politics when they make monetary policy. Reality is more complicated.
In 2018, the Fed kept raising rates despite Trump’s calls for easier money. But it may have raised rates too far in December just to show it couldn’t be cowed by political pressure. Powell backtracked two weeks later. But if the Fed and Powell appear to bow to presidential pressure, the market and the public could see it as more political than independent.
The temporary economic boost from the GOP 2017 tax cuts has faded, and Trump’s trade policies have increased the risk of recession. How should the Fed respond to the president’s attacks and the associated economic uncertainty? It could remain focused on its economic models. It could continue its year-long “listening tour” to bolster its contact and credibility with the public. It could hope that one or two “insurance cuts” prolong the record economic expansion.
Powell makes a point of meeting with members of Congress regularly. Those visits seem to pay dividends: Few lawmakers have joined Trump in attacking the Fed. But members of Congress also want to keep the expansion going as the 2020 elections approach. If the labor market sours, lawmakers will surely blame the Fed and join the call for lower rates.
If the Fed keeps cutting rates, it’ll be hard to know whether central bankers gave in to the president or whether a weakening economy forced their hands. Either way, expect the president to keep targeting the Fed.
Mark Spindel is founder and chief investment officer at Potomac River Capital, a Washington-based investment firm.
Sarah Binder and Spindel are co-authors of the award-winning “The Myth of Independence: How Congress Governs the Federal Reserve” (Princeton University Press, 2017).