Donald Trump’s attempts to bring the US Federal Reserve Board under his control continue to undermine his ability to do just that.
On Wednesday, Trump said that if the Fed chair, Jerome Powell, didn’t leave the central bank when his term as chair ends on May 15, he would fire him, doubling down on the endless threats he has made (in both his terms as president) because the Fed hasn’t done what he wants – slash US interest rates.
“I’ll have to fire him. Ok? If he’s not leaving on time,” he said in an interview with Fox Business.
“I’ve held back firing him, I’ve wanted to fire him, but I hate to be controversial,” Trump said.
He also said that a Department of Justice investigation into a big overrun in the budget for renovations to the Fed’s Washington headquarters, Powell’s role in the blowout and testimony he gave to Congress would continue.
“Don’t you think we have to find out what happened there? Whether it’s incompetence, corruption or both, I think you have to find out. I really do.” The investigation is widely seen as a pretext to create the grounds for firing Powell.
Three DoJ investigators arrived at the Fed’s headquarters earlier this week but were turned away by Fed officials.
Trump’s intransigence is undermining his vendetta against Powell and his efforts to replace him with his nominee as Powell’s successor as chair, Kevin Warsh.
Warsh is scheduled to appear before the Senate Banking Committee, which is reviewing his nomination, next Tuesday.
An influential member of that committee, Republican senator Thom Tillis, has said he will only vote to confirm Warsh if the investigation into Powell is dropped. With only a narrow 13-11 Republican majority on the committee, Tillis’ stance would probably freeze the nomination process.
Continuation of the probe also makes it even more likely that Powell will refuse to stand down as chair when his term expires – he has cited precedent and legal authorities that would enable him to remain as acting chair until Warsh is confirmed – and that he will remain on the Fed’s board, contrary to normal and longstanding practice, until his term as a governor expires in early 2028.
The Federal Reserve Act says that, on the expiration of their terms in office, board members – and that presumably includes the chair – shall continue to serve until their successors have been appointed and have qualified. In the past, Fed chairs have stayed in the role until their successor has been confirmed and joined the board.
Powell said last month that he had “no intention of leaving the board until the investigation is well and truly over, with transparency and finality.”
If he stays on the board, it would deny Trump an opportunity to put Warsh into a vacant seat.
Stephen Miran, a key figure in the administration who stepped down as chair of Trump’s Council of Economic Advisers to join the board, might have to step aside to give Warsh his seat.
As one of seven governors, and only one of the 12 voting members of the Federal Open Market Committee that decides US monetary policy and sets the Fed’s policy rate, Warsh would struggle to deliver what Trump has consistently demanded – lower interest rates to boost the US growth rate and lower the cost of servicing the government’s rapidly increasing $US39 trillion-plus ($54 trillion) of debt.
Even if Warsh is successfully nominated and even if Powell didn’t remain in place, it is unlikely that Warsh would impose Trump’s will, given the current economic settings.
Inflation was already edging up, thanks to Trump’s tariffs, before the US and Israel attacked Iran and caused the price of oil to rocket above $US100 a barrel, with material flow-on effects for US fuel prices and the inflation rate.
Those effects will linger well beyond the duration of the war, making it probable that the Fed will leave its policy rate unchanged, or even raise it, until there is clear evidence of inflation subsiding.
Trump’s determination to maintain the investigation of Powell, while causing collateral damage to his efforts to seize control, or at least gain significant influence over the Fed’s decision-making, continues despite their apparent futility.
In January, the DoJ served subpoenas on the central bank that were quashed by a US District Court judge, who ruled that there was “abundant evidence that the subpoenas’ dominant (if not sole) purpose is to harass and pressure Powell either to yield to the president or to resign and make way for a Fed chair who will”.
That ruling has yet to be appealed, but the visit to the Fed quarters this week by federal prosecutors shows that the DoJ hasn’t given up its pursuit of Powell, even though it appears obvious that the investigation has been motivated purely by Trump’s animus towards him.
The prospect of success in any attempt to actually fire Powell is dim.
Fed governors can only be fired “for cause” and a continuing attempt to sack another governor, Lisa Cook, on a “Trumped-up” charge of mortgage fraud – without evidence of any fraud being presented – is experiencing heavy going before the US Supreme Court, where the judges seem concerned about any White House encroachment on the Fed’s independence.
The intensity of Trump’s dislike for Powell, which stems from Powell’s refusal to do what Trump wants and lower rates regardless of the economic context, has blinded him to the rational course of action: end the investigation, get Warsh confirmed and hope that Powell resigns from the board.
Even if Warsh is successfully nominated and even if Powell didn’t remain in place, it is unlikely that Warsh would be to be able to impose Trump’s will, given the current economic settings.
He also doesn’t seem to appreciate that, even with Warsh in place and Powell gone, he would struggle to impose his will on a Fed which has, perhaps thanks to his crude efforts, been showing increased independence.
Asked in an interview this week whether he expected interest rates to fall this year, Trump was optimistic.
“When Kevin gets in, I do,” he responded.
Warsh and Miran – even if the two other Trump nominees on the board (Michelle Bowman and Christopher Waller, who have recently also shown an independent streak) voted with them – couldn’t decide the outcome of the Open Market Committee meetings.
If Powell remains on the board and a talisman for Fed independence, rate cuts in the face of rising inflation would be even less likely.
For now, the clock is ticking louder on the timeline for Warsh’s appointment and the opening of a new front in the long-running stand-off between Trump and Powell.
That hasn’t, yet, unsettled investors and financial markets.
If the threat to the Fed’s independence of Trump’s ambitions were ever to appear more realistic, the implications for the bond market in particular – the market the administration is tapping to refinance ever-increasing levels of maturing debt while adding new debt and rates not seen in the post-World War II era – would, however, be threatening and potentially destabilising.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.