Trumping the Federal Reserve?

Harold Black, PhDBlog

In the last month or so of 2018, we saw a highly volatile stock market capped off at year’s end by the largest single point gain in history. All the pundits have an explanation. It’s Brexit, oil prices, slowing world economies, Trump’s tariffs on friends and foes and, of course, the Fed. Blaming the Federal Reserve seems to be the president’s favorite, as he regularly excoriates Fed chairman Powell, saying that his appointment was the president’s worse mistake. There was even speculation that Trump might fire Powell. The question is, “could he, since the Senate confirms the Fed chairs to fixed terms.?” The answer is maybe. The Federal Reserve Act says that a chairman can be removed “for cause”. This president might interpret this as being Powell should be fired “cause” I don’t like him. However, since the chairman is also a sitting governor, his removal as chairman would still mean he would remain at the Fed. More importantly, he would continue as a member of the body that makes the decision on interest rates – the Fed’s Open Market Committee – which is made up of all the Fed governors, the president of the New York Fed and four of the remaining eleven reserve bank presidents. Therefore, it is not a stretch to say that the removal of Powell as chairman may not affect the policy decisions at all. To my knowledge only one president addressed the Open Market Committee directly. That was Harry Truman who met with the entire committee to discuss the movement of interest rates. He failed to change their policy direction.

It seems to me that a reasonable explanation for the stock market volatility is that having ridden the bull market since Trump’s inauguration, investors decided to take profits, particularly before year-end.  At that point, the traders who trade intraday jumped in to take advantage of the sudden changes in stock prices. Nonetheless, the rise in the market should be credited to the change in administrations. The Obama era’s policies were anti-business, with heavy handed and burdensome regulations stifling economic growth. The Trump tax cuts and regulatory relief unshackled businesses. 

However, Trump is also responsible for the Fed’s actions. First, he chose a sitting governor as chairman so why should he expect a change in Fed policies? Former Fed chair Greenspan remarked that Powell was doing what all previous Fed chairs would have done. Second, the tax cuts were not accompanied by spending cuts, setting the stage for inflationary pressures in the future. These pressures only add to the imbedded inflationary pressures caused by Fed policies during the previous recession. 

Lastly, the one Fed chairman that was an outsider was completely lost, forcing the president to make a change. That was G. William Miller, appointed by President Carter. Miller was removed as Fed chair by Carter, who appointed him as Treasury secretary replacing Michael Blumenthal. Paul Volcker replaced Miller. So maybe Trump could have Powell and Treasury secretary Mnuchin swap jobs. Just saying.

Dr. Harold Black is professor emeritus at the University of Tennessee, Knoxville. This piece appeared in the USA TODAY NETWORK – TENNESSEE.