Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Trump Could Fire Powell and Rebuild the Fed

Politics / US Federal Reserve Bank Sep 10, 2018 - 03:33 PM GMT

By: John_Mauldin

Politics BY PATRICK WATSON : In recent weeks, Trump criticized Federal Reserve Chairman Jerome Powell several times. He doesn’t like that Powell is leading the Fed to raise interest rates.

Past presidents avoided such comments so they wouldn’t appear to be interfering. But Trump doesn’t care about appearances.

The Fed is somewhat insulated from electoral politics. The chair and board members have fixed terms. Its composition changes slowly... but it doesn’t have to.


Tucked away deep inside the Fed’s founding law is a provision Trump could use to completely rebuild the Federal Reserve Board of Governors.

Markets should pay attention. I don’t think they are.

Breaking Precedent

A common perception, even among Fed experts, is that presidents can’t fire the chair and board of governors once they take office. They’re thought to be like the Supreme Court in that regard, although they don’t serve for life.

But that’s not quite correct.

The Federal Reserve Act doesn’t explicitly give the US president power to fire the Fed board members. But section 10 has a mysterious little phrase indicating it’s at least 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.”

That’s all it says on the subject, as far as I can tell. The Act doesn’t define what the word “cause” would entail. But Congress clearly thought the US president should be able to remove board members before their terms expire, under certain conditions.

This legislative time bomb has been lurking in there for decades. Now we have a president who loves exercising unilateral power in ways his predecessors did not.
  • He’s used the pardon power several times without the normal review process.
  • He fired the FBI director to try and stop a criminal investigation.
  • He imposed import tariffs on imaginary “national security” grounds.

Trump doesn’t mind breaking precedent to achieve his goals. So if he wants to remove Jerome Powell, I think he will do it. No one can stop him.

Would Congress object? Probably, but its members have yet to impose any meaningful constraints on Trump. All he has to do is dream up some “cause” and most will fall in line.

More Than a Tail Risk

As of right now, the seven-member board of governors has three vacancies. So firing Powell would leave three others in place: Randal Quarles and Lael Brainard under vice chair Richard Clarida, whom the Senate just confirmed last month.

While we haven’t seen Clarida vote yet, his academic work says he likes low rates. Quarles and Brainard aren’t as dovish as Trump seems to want, but seeing their chairman get the axe might change their attitude. Or he could fire them too.

The other Federal Open Market Committee (FOMC) members are all regional Fed bank presidents. But in this situation, Trump would control the board of governors. And the board, in turn, can control the Fed banks. I think their presidents would see the light.

Such a scenario is far from impossible. It may be why Powell’s rhetoric turned more dovish at Jackson Hole last weekend.

You might think financial markets would freak out. I’m not so sure. Lower short-term rates combined with higher inflation expectations would steepen the yield curve, enhancing bank profit margins. Debt-driven industries from housing to autos might also benefit.

The long-term damage would be enormous. The US dominates the global economy in part because we have stable, rule-driven institutions like the Fed. Letting politics openly drive monetary policy would remove the aura. Another central bank might rise to fill the Fed’s former role.

Again, I am not predicting any of this will happen. I’m saying it is possible.

Traders talk about “tail risks,” those remote possibilities that would have huge consequences. The odds Trump will fire Powell or other Fed officials are low, but well above zero. It’s more than a tail risk.

So while the economic data might say the Fed should keep tightening, Donald Trump might have other plans. And if he does, he will probably get his way. 

Combined with the looming trade war, this could easily negate the economic benefits of lower taxes and deregulation. It’s a real risk, and I think few are prepared for it.

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in