Washington Insider Perils To Firing The Fed Chair

There seems to be wide and growing concern about a bitter fight between the President and the Fed. Bloomberg says the president says he likes winning, but concludes that "it’s difficult to count up anything but losers if he fires Federal Reserve Chairman Jerome Powell." The president has been discussing whether he can dismiss Powell, Bloomberg says, and that is prompting Treasury Secretary Steven Mnuchin and others to say that president doesn’t believe he has that authority. If he decides to push ahead anyway, the president will be up against powerful forces that could deliver unwelcome verdicts in three principal arenas: the financial markets and economy, the U.S. Senate and the courts, Bloomberg warns. For example, firing Powell could undermine the U.S. currency, leading to higher longer-term interest rates as foreign investors who are critical to financing America’s growing deficit balk, said Mark Spindel, the head of Potomac River Capital, a Washington investment fund. "I can’t think of one U.S. asset you would want to own," said Spindel, co-author of a book on the Fed’s relationship with Congress. "Where is the president helped by any of this?" The president has been simmering for months over Fed policy, claiming rising interest rates are putting a brake on his economic plans, though many companies have cited the trade war as negatively impacting business. On Wednesday, Fed officials raised the benchmark lending rate a quarter point to reflect a strong economic outlook for 2019. That decision was unanimous, with all of Trump’s appointees and the five reserve bank presidents who aren’t politically appointed voting in favor. Policy makers also forecast that they expect to hike borrowing costs twice in 2019. Stocks tumbled further amid confusion over the Fed’s message and a separate fight over a government shutdown. The irony is that if the president does try to fire Powell, it could erode the central bank’s economic outlook and hit growth and hiring. In that case, policy makers might have to pause their rate hikes. Then, it would become a matter of who the public blames for the slowdown: the president or the Fed. "Firing the Fed Chairman over a one quarter-point move, with real economic data as strong as they have been, would be utter madness and highly counterproductive," said Jeffrey Lacker, a former Richmond Fed president, now a professor at Virginia Commonwealth University. Ultimately, the president’s influence is limited. "The president can try and fire the chairman but he can’t change the whole Federal Reserve because he is not responsible for its creation," Michael Bordo, a professor at Rutgers University, said. The second arena involves the Senate, which confirmed Powell and, together with the House, presides over the Federal Reserve Act. It isn’t clear that the Senate would blithely accept Trump’s wishes and rubber stamp a new chairman. Alabama Republican Senator Richard Shelby, a former chairman of the Senate Banking Committee, publicly warned Trump against the move on Saturday after Bloomberg reported the discussions said, "The independence of the Fed is foundation of our banking system." Powell could stay on as a governor and be elected Federal Open Market Committee chair even if the president removed him as Fed Board chair, because the two positions are distinct. The FOMC, the Fed panel that sets interest rates, could even elect a non-politically appointed Fed bank president as chair. The third arena involves the legal battle over removal. The Federal Reserve Act stipulates that the president can only remove a Fed governor - and Powell is also a governor - "for cause," a reason that typically doesn’t cover policy differences. Powell’s Senate confirmation and fixed terms provide more protection and have been interpreted by the courts as limiting the president’s authority to dismiss his own appointments in order to grant an agency greater independence. So, we will see, but certainly this is a fight producers should watch closely if it does emerge, Washington Insider believes.