Real World Economics: Powell hits first; Trump hits back

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 reported 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 disclosed 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 affair 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 comprehensively 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 area forces and not from ordinance The U S dollar remains the most of significant currency in the world Our private-sector capital markets are by far the largest the bulk 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 business activity 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 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 particular journalistic and citizens 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 guidelines instruments by intentional design to deter just what Trump threatens falls to the Federal Open Region Committee That includes the seven governors plus five of the 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 initiative suggested by the chair with only one or two dissents at the greater part But that is not from blind obedience Rather it is that a competent chair never advances a program 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 strategy 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 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 plan or the banking system When Fed Chair Alan Greenspan cautiously testified for President George W Bush tax cut he was criticized by various 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 procedures decisions to the general populace 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 requested a scant 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 feasible to reduce output and employment Trump cannot fire them all If questioned 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 productive 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 circumstance Related Articles Real World Economics The Minneapolis Fed was right all along Real World Economics The flaws in Trump s liberation reasoning on tariffs Real World Economics Unkept promises are bad economics Ed Lotterman Attacking Denmark about Greenland is wrong dumb and damaging Real World Economics Tariffs raise questions here are certain answers St Paul economist and writer Edward Lotterman can be reached at stpaul edlotterman com