At a time of grave investor uncertainty over the coronavirus, economists warned that the president could throw fuel on the fire.
President Trump said on Saturday that he had the power to remove or demote Jerome H. Powell, the Federal Reserve chair, renewing a long-running threat against the central bank’s leader at a time when it could further roil volatile markets.
Mr. Trump said in a news conference at the White House that ousting Mr. Powell was not his current plan but that he was “not happy with the Fed” because it was “following” and “we should be leading.” He said he had the right to remove Mr. Powell as chair “and put him in a regular position and put somebody else in charge,” but added, “I haven’t made any decisions on that.”
While it was a familiar threat from a president who has continually beaten up on Mr. Powell, it was made in the midst of growing concern that the spread of the coronavirus could tip the United States into a recession.
The mere hint that Mr. Trump could fire Mr. Powell, or demote him to a Fed governor, risks further destabilizing markets by worrying investors, who are already fretting over the economic fallout from shut-down businesses, quarantined workers and curtailed activity.
Investors have been looking to the Fed to help contain the economic fallout, and Mr. Powell led his colleagues in slashing interest rates by half a percentage point in one of the earliest global central bank responses to the coronavirus. The Fed has also been active in soothing disorderly markets over the past week.
“If he removed Jerome Powell, it would be hugely destabilizing to markets,” said Ernie Tedeschi, a policy economist at Evercore ISI in Washington. “The market trusts Jerome Powell to do what monetary policy can do. Jerome Powell gets it.”
As coronavirus cases mount globally, upending supply chains, canceling travel plans, emptying restaurants and closing offices, analysts are penciling in an increasingly severe economic impact. Some now expect the United States to fall into a recession this year.
That has caused a dramatic sell-off in stocks and wild moves across corporate and government bond markets. The Fed has been intervening to keep the financial system functioning smoothly.
The central bank’s policy-setting committee meets this week in Washington, and it is widely expected to cut interest rates — perhaps to near zero — at or before that gathering. It could also renew bond buying or roll out other emergency programs meant to stabilize the inner workings of financial markets, economists expect.
Mr. Trump probably does not have the legal authority to fire Mr. Powell, whom he nominated in 2017 but who was confirmed by Congress. It is less clear whether the president could demote him, but if he tried, the Federal Open Market Committee — which sets interest rates — could still select Mr. Powell as its leader, rendering any new chair mostly irrelevant.
This is not the first time Mr. Trump has aired the idea of removing his hand-selected Fed chair. In December 2018, after the Fed raised rates, the president privately talked about firing Mr. Powell, telling advisers that the Fed chair would “turn me into Hoover,” a reference to the Great Depression-era president Herbert Hoover. The statements caused jitters on Wall Street.
Mick Mulvaney, who had recently been named the acting White House chief of staff, said in a subsequent television interview that Mr. Trump “now realizes he does not have the authority to fire” the Fed chair.
This time around, Mr. Tedeschi said he doubted the president would try to demote Mr. Powell, and was probably just trying to jawbone the central bank ahead of its meeting this week.
“I think people are used to it, at this point,” he said. “But it probably doesn’t help.”
<blockquote class=”twitter-tweet” data-lang=”en”><p lang=”en” dir=”ltr”>China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…</p>— Donald J. Trump (@realDonaldTrump) <a href=”https://twitter.com/realDonaldTrump/status/1020287981020729344?ref_src=twsrc%5Etfw”>July 20, 2018</a></blockquote>
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And yet, both his tax cuts and trade war are contributing to these dynamics.
- You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed’s naturally going to ramp up their concerns about overheating.
- At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit.
- Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.
The figure below, an index of the value of the dollar against a basket of foreign currencies, shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit. Relatedly, as Trump’s tweet mentions, the Chinese yuan is falling sharply against the dollar, down about 7 percent since April, a movement that directly offsets that same amount of Trump’s tariffs.
In other words, the president has a point. But while part of this is what he gets from inheriting a strong economy — something I suspect he wouldn’t trade — part of it is because of his and his party’s actions.
.. The Fed is different, as its independence from politics is so vital. There are many sad examples of countries whose economies did a lot worse than they should have because their central banks became an arm of the government.
.. That said, I’m not reaching for the vapors. I really wouldn’t want to see Trump ratchet up his Fed critiques to a regular feature of his daily rants.
.. So, if you’re listening, Mr. President, no point in whining about a currency appreciation to which you’re contributing. Whine as you might, you can’t have a “great economy” closing in on full employment, an independent Fed, a big tax cut, a trade war — and a falling dollar.