Did Fed Chair Powell Cave To Trump?

Concerns about the US central bank's independence.

The Federal Reserve’s vaunted independence is an important part of the institution’s culture and will be staunchly defended by Jerome Powell, its current chairman. Asked recently if he would step aside if fired by President Trump, Powell responded curtly, “No.” Nonetheless, a kinder, gentler Fed seemed to emerge in the weeks since the president broached the topic.

The minutes of the Fed’s December policy meeting said that volatile financial markets, trade tensions and signs of slowing in the global economy had made “the extent and timing of further policy firming less clear than earlier.” The minutes added that “many participants [of the Federal Open Market Committee] expressed the view that, especially in an environment of muted inflation pressures, the committee could afford to be patient about further policy firming.”

Powell revealed in a January 4 speech in Atlanta that not only is the Fed data-driven, but it also is watching anxious financial markets and their potential impact on the economy. When conditions change, the Fed changes. The question remains, however, about whose patience will wear out first, particularly if the economy kicks into high gear again.

The Fed’s independence is based on tradition, not on law. While presidents have generally treated the Fed differently than other “independent” agencies, Trump is the first president in 25 years to publicly criticize the Fed. Law or no law, few doubt that a Powell firing would send shockwaves through global financial markets.

Under the Federal Reserve Act, a governor can be removed “for cause,” likely meaning dereliction of duty or some kind of malfeasance. White House advisers have said they would like to arrange a meeting between Powell and Trump. The Fed chief didn’t say if he planned to attend what could be a behind-closed-doors showdown, such as hasn’t occurred since President Richard Nixon pressured then-Fed chair Arthur Burns to adopt expansionary monetary policies to improve his reelection prospects.

Meanwhile, the current debate continues over how long the Fed will continue to passively allow its holdings of mortgage and US Treasury securities to shrink.