President Donald Trump, who made a television career out of saying “You’re fired!” to people, wants to say those words to Federal Reserve Chair Jerome Powell. On Wednesday, White House officials told media outlets that Trump would likely fire Powell “soon,” only for the president to back off later in the day after the stock market started to nose-dive. I’ve written before why that’s a terrible idea: It undermines the independence of the central bank, and history is brimming with examples of that invariably turning out badly. And there’s another factor for Trump to consider: Just firing Powell won’t get him what he wants.
The reason for Trump’s anger comes down to different goals. The Fed’s goal is to engage in the balancing act of maximizing employment at stable, low inflation. The president has two goals. One, he wants to preside over a hotter economy and believes that if Powell and the Fed would lower the interest rate they control as their key tool of monetary policy, that will get him there. Two, he and the Republicans just blew out the deficit, and lower rates would make servicing the growing debt burden easier.
Unless there’s a big economic shock, the Fed neither slams the brake nor pounds the accelerator.
The problem is that central banks that must follow their presidents’ orders tend to floor the accelerator until the engine overheats and the car shuts down. Independent central banks, conversely, speed up and slow down as needed to keep the car running.
What, specifically, is Powell doing that’s making Trump so unhappy? After all, though Trump said Wednesday that “I was surprised he was appointed,” it was Trump himself who appointed him (President Joe Biden then extended Powell’s appointment).
The answer is clear: Powell won’t lower the interest rate fast or far enough. And you can be sure neither he nor anyone else on the Fed board will lower it anywhere close to the 3 percentage-point cut Trump has most recently called for, a move that would bring the rate from about 4.3% to 1.3%.
These days, unless there’s a big economic shock, the Fed neither slams the brake nor pounds the accelerator. Instead, they lower rates by a quarter point at a time. From their public guidance, it sounds like they might do so, but not until their meeting in mid-September.
Only replacing Powell wouldn’t be enough to change that course. Powell is just one vote of 12 on the Federal Open Market Committee that votes every six weeks or so on whether to raise, lower or hold rates. The majority of the FOMC would not vote to suddenly cut rates at the level Trump demands. Of course, it’s always possible that Trump could just fire more FOMC members, but such a move would only destabilize the markets further.
Economically, the Fed’s current policy is highly defensible. Trump’s right that the Fed’s interest rate is high relative to where it was in his first term, and low rates (along with stimulus spending) were especially essential during the pandemic-induced recession. But, as Powell has pointed out in public statements, given where the economy is right now, holding the rate around 4% makes sense. There’s a lot of uncertainty about where both inflation and growth are headed, all of which, for the record, stems not from the Fed but from the Oval Office. Trade wars that weaponize sweeping tariffs push inflation up and growth down. This is a challenge for the Fed because it implies contradictory needs to hit the brake (to offset higher inflation) and the accelerator (to offset slower growth).
This administration creates its own reality. The Fed, however, must live and work in the actual reality.
So, their best play is to stay in wait-and-see mode until they have a clearer take on where the tariffs land, how much they raise prices and what effects they have on growth. Under these conditions, it would be malpractice to lower rates by 3 percentage points. It would be like driving into a fog and accelerating from 30 to 90 mph: reckless, foolish and sure to cause an accident. And because it would push inflation up, it would lead investors to demand an “inflation premium,” i.e., a higher interest rate in exchange for their loans, i.e., the opposite of what Trump is looking for.
Now, consider this bit of irony: If there was no trade war, the Fed would have already lowered interest rates. If Trump wants the Fed to lower the interest rate, end the trade war. Or at least stop negotiating, pushing back dates, and settle and stick to a set of tariff rates. He doesn’t need Congress; he doesn’t need to fire Powell. He can do that himself.
But the president almost certainly doesn’t make this connection, because neither he nor his team seems to understand how these parts fit together. They don’t believe the tariffs have any impact on inflation, despite the fact that we saw those effects earlier this week in the release of the latest consumer price index. They see no inflationary risk to sharply lowering rates, and no damage to the economy’s future by compromising Fed independence.
That’s another way to understand this problem. This administration creates its own reality. The Fed, however, must live and work in the actual reality.
So, the president continues to harangue Powell and threaten to replace him with someone who will do what he tells him to do. He’s clearly champing at the bit to revert to his “You’re fired” schtick and take control of interest rates. I hope I’m wrong, but from what I’ve seen of this president, I fear he won’t be able to resist much longer.