Trump and Powell, Fighting Again

This is their second great row. The first occurred in 2018 and 2019. As then, Trump today, like most presidents before him, has pushed for lower interest rates because he wants the economy hyped for electoral reasons – in this case, next year’s midterms.  Powell’s resistance seems to stem from a more nuanced blend of policy judgements, concern for his personal legacy, and maybe partisan politics as well. If history and the 2018-19 dispute are any guide, the Federal Reserve (Fed) chairman will bow to the president.

Trump’s Leverage Over the Fed

Trump can get his way, of course, by firing Powell, even if such an act generates yet another procedural crisis (that media would no doubt label “constitutional.”) Alternatively, Trump could get his way by adding more and sympathetic Fed governors, or “pack the Fed” to draw on a phrase describing how a president might get political ends from the Supreme Court. Firing or “packing” doubtless will not be necessary. Fed chairs have always given way to presidential pressure, whatever the economic repercussions, and Powell has hardly shown himself immune from political pressure in the past.  

Despite all the hoopla over Fed “independence,” there is a long history of Fed chairs yielding to White House wishes. Arthur Burns caved to Nixon and eased monetary policy dramatically in 1971 despite continued inflationary pressures. Burns did the same for the Ford White House in 1975. Even Paul Volcker, the ultimate hero of the fight against inflation, initially followed misguided White House pressure to implement credit controls, before he eventually imposed the needed severe monetary restraint. Indeed, it might have been the utter failure of the credit controls and Volcker’s profound embarrassment that emboldened him finally to adopt the policies that defeated inflation.  Ben Bernanke all but followed orders from the Treasury during the financial crisis of 2008-09. 

Powell’s Political Flexibility Under Biden

More recently, Powell has shown his own political sensitivities. In 2021, for example, he set aside policy advice from his own board to bow to the needs of the Biden administration’s huge spending bills. He allowed rapid growth of the economy’s money supply and kept interest rates inordinately low, near zero in fact, despite the economy’s robust recovery from the pandemic lockdowns. When the inevitable inflation became apparent late in 2021, and consumer prices began to accelerate from less than a 2 percent annual rate of advance to upwards of 7 percent, Powell, again against advice inside the Fed, continued to gratify the White House, refusing to take his foot off the metaphorical monetary gas pedal, announcing that the inflation was “transitory,” nothing to worry about, and the result price pressures in a few isolated sectors due to supply-chain constraints. None of this was justified, as several prominent economists inside and outside the Fed argued.

In addition to Powell’s willingness to serve the White House agenda by keeping monetary policy easy and interest rates low despite the inflation, he had a more personal consideration. Powell knew he was up for re-appointment as Fed chair and had no desire to do anything but gratify Biden, who, if Powell had become difficult, could easily and conveniently appoint someone else. As if to announce the importance of this personal consideration, Powell, right after Biden announced the reappointment in November 2021, quickly retired words like “transitory” and adopted a strident anti-inflationary policy stance.

Why Powell Is Resisting Trump – For Now

Reappointment is no longer an issue for Chairman Powell. President Trump has made clear that will not happen. The chairman has no personal reason to gratify the President as he did in 2021. On that score, he has little trouble defying Trump’s demands for lower interest rates, and he has, even as many economists inside and outside the Fed have argued that the economy is slowing and could use the help of lower rates. Powell’s rigidity on this point would seem then to flow from one of three reasons: First, he may feel a need to hold the line on existing policy or only modify it slowly because inflation, though much tamer than previously, remains above the Fed’s informal 2 percent target rate. Second, Powell has said that he worries over the eventual inflationary effects of Trump’s tariffs and wants a policy counterweight to them. Third, Powell’s well-known dislike of Trump may have impelled him to avoid any policy shift that might help the President in the mid-terms.

Legacy, Logic, and a Shaky Justification

The first of these is entirely plausible. Powell has secured something of a reputation as the man who stemmed any inflationary momentum in this economy. He is no doubt loath to detract from that legacy by reversing policy too soon and repeating the mistakes made by past Fed chairmen during the great inflation of the 1970s. His public concerns over tariffs, though reasonable on the surface, are however suspect. Back in 2019, when Powell finally bowed to Trump’s demands for lower interest rates, he claimed as his reason that the tariffs of that time would slow the economy and so demanded some interest rate relief. Now he is saying that the tariffs are inflationary and demand a pause in any move toward rate relief. The economy is a concern now and inflation was a concern then. Today’s reasoning simply does not hang together.

Though there can be little doubt that Powell dislikes Trump and wants him to fail, it is a step too far to consider this as a reason for his resistance to interest rate reductions. Even in Washington, where egos inflate to undreamed-of sizes and spleen can flow in rivers, it is hard to suggest that an official would manipulate policy to pursue some kind of personal vendetta. The slim possibility is only included here for completeness’ sake. Whatever Powell’s reasoning and motivations, the history of past disputes between presidents and Fed chairs, as well as Powell’s own past behavior suggest that he and the Fed will ultimately bow to the President’s wishes, perhaps slowly at first but then fully. The turn is already evident. At the most recent Open Market Committee Meeting (FOMC), he received more resistance from members than any chair has faced in years.