Trump and the Fed: Do the President’s Comments Matter?

In recent weeks, Trump has criticized the US Federal Reserve’s hawkish stance, and their guidance which indicates that further rate hikes are in the pipeline.  Past presidents have avoided commenting on the Fed publicly, as it might be seen as interfering.  Trump however, cares little about appearances. 


“I think the Fed is making a mistake. They are so tight. I think the Fed has gone crazy” – Donald Trump October 10th, 2018


Meddling Presidents of the Past


There is a widely held view that the Federal Reserve is a body independent of the sitting government.  After the Fed increased interest rates in 1965, President Lyndon Johnson called the then-Fed Chairman William McChesney Martin to Johnson’s Texas ranch, and purportedly shoved him against a wall to show his displeasure with the rate hike.  Presidents have been pressuring the Fed virtually since its creation:



So What Makes This Time Different? 


There is a common perception, even among Fed experts, that presidents can’t fire their the Chair and Board of Governors once they take office.  This however, is a misconception1.  The Federal Reserve Act doesn’t explicitly give the President the power to fire Fed board members, but Section 10 of the Act indicates that it is possible;



“…thereafter each member shall hold office for a term of fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President


This last line is the key.  Clearly when this Act was written, Congress thought that the President should have the power to remove a board member before the end of their term.  And we now have a President who seems to relish exercising unilateral power in ways no other president has done;



So it would not be surprising should he decide to fire Fed Chairman Jerome Powell ‘for cause’. We think this is a low probability event, but it is worthy of consideration.


What Would Happen to Currencies If Powell is Fired?


As we have stated many times in our Big Picture pieces, the market hates uncertainty.  Currently we have a US central bank who has been quite clear in their plans to continue raising rates, citing concerns over the extremely low unemployment rate, and escalating inflation as reasons to tap the brakes on growth.  Whether or not you agree with their plans, there is a great deal of transparency and certainty at present.  Should Trump replace Powell with someone who will be more dovish, while this may be seen in a positive light by the equity market, at least in the short term, the currency market will likely revise lower their forecasts for the USD, as forward-looking interest rate differentials will narrow.  More importantly though will be an assumption by the market that the Fed is no longer independent, and is in fact under the control of the President.  Faith in the Fed will be significantly eroded, and without a strong central bank, the market will begin to move investment to countries with a more stable and independent central bank.


1 – Forbes: “How Trump Could Fire Powell and Rebuild The Fed” – September 6th, 2018




Author: John Glover



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