Barbarians at the Eccles-Gate

The Fed is under siege.

Barbarians at the Eccles-Gate

The Fed and the Administration are often at odds. Politicians want to be elected so as election years approach, they want lower rates. The Fed has a different, broader mandate, a dual mandate that is pursued with different vigor and emphasis depending on the times and the Fed Chair. Currently, the Fed is poised to cut rates as it waits to see if inflation will remain compliant as tariffs phase in. Trump is eager to cut rates now, yearning to seal up a strong economic performance going into the midterm elections next year. Trump and Powell are at odds.

As they say, different strokes for different folks.

The Fed has been assailed for some time by Trump to cut rates—cut them more and faster.

The Fed was able to cut rates deeply ahead of the 2024 elections that Trump nonetheless won. Rate cuts ahead of an election are viewed as favoring the incumbent. The Fed cut rates then without a clear imperative.

So, there is bad blood between Powell and Trump even though Powell would deny it.

In a recent testimony about the Fed’s renovation, Fed Chair Powell made some statements that have put him under increased scrutiny by the president. The Fed had queued up an elegant restoration of several older buildings it now owns, and its plans have been criticized, especially since the Fed is now making huge losses instead of profits. Trump and others say the project is overly opulent. In addition, there are cost overruns (what else is new?) and a huge ticket price for the project. Trump is eager to find some indiscretion by Powell he can use as a lever to wedge him out of office. For now, Trump is focused on this project and the statements Chair Powell made in front of the Senate banking committee, where some Trump officials and others claim Powell has testified to things that are not true. The Fed is up in arms in defense. But potentially this could be a career ender for Powell.

However, everyone and their mother is aware that Trump is looking to exaggerate any minor indiscretion he can find to remove Powell since the President has been told that he could only fire Powell for cause. So naturally Trump is out scouring for ‘cause.’

This is an extremely tawdry episode in US policymaking. Agree with or disagree with Chair Powell; policy disagreements are no reason to remove a Fed Chair.

Many people have closed ranks around Powell and argued that he is not a construction manager; cost overruns are not a dismissible offense. Well, that sure is true.

But let’s remember that Richard Nixon did not order a break-in to the Democratic National Committee offices at Watergate. But once the Op was detected, Nixon went into full denial mode to cover it up. And for THAT he was impeached. Hillary Clinton wiped a server whose contents were under subpoena and took no consequences. That law is applied in a very idiosyncratic way. Martha Stewart was convicted of having erased or modified some notes on her blotter and found to have obstructed justice. So, the charges against Powell if he was not truthful over even seemingly minor aspects of the construction project while testifying are potentially severe.

And Trump would be glad to be ride him out on a technicality.

So…let’s suppose Powell is removed...then what?

Were that to happen, a new governorship would open a term to serve on the board. A Fed chair term would open; Powell’s term as chair ends in February 2026.

So, if Powell resigns, a new chair could be assigned through February of 2026. And that person would probably be promised a full term starting in 2026 when the Powell term expires. But would he necessarily get that reappointment? That might depend on performance.

Suppose Trump filled that post through Fed of 2026. He would completely control that person until he reappointed him. And that new chair would not be viewed as a monetary policy leader at the Fed.

It is highly likely that such a potentially lame-duck Fed chair would have a hard time bringing the committee to his point of view. Chairs at the Fed rule through credibility and respect. A political appointee doing the president’s bidding would be unlikely to impress the committee with his leadership.

So, such a nominee at the Fed would have a tough row to hoe, and despite promises from the President on renomination, he would be a likely candidate to NOT get the eventual full-term appointment.

So…

This Trump-Powell spat will be one for the ages. The aside here is that since Trump is pushing Powell to cut rates faster and since the Fed prizes its independence, Trump’s public exhortations may make it LESS likely that Trump can convince the Fed to cut rates if Powell is able to withstand this latest Trump attack.

This is an extremely odd episode in US politics and in Fed history. There have been Fed chairs who were disliked by presidents, but Trump-Powell is a special situation. Ronald Reagan wanted Volcker to cut rates. He was able to appoint a number of like-minded Fed Board members who eventually were able to oppose Volcker and wrench a policy change in the form of a rate cut that Volcker opposed. But that episode was much less antagonistic and less public and not done in the age of social media.

Stay tuned…