When Will Donald Trump Fire Jerome Powell?
Author: Greg Valliere
June 25, 2019
JUST A MATTER OF TIME: Donald Trump has confirmed that he has researched whether he can fire Jerome Powell — and, not surprisingly, Trump has concluded that he has the authority to remove the Fed Chairman. This extraordinary assertion in recent days by the president convinces us that it’s only a matter of time before Powell leaves. But when?
TRUMP NEEDS A SCAPEGOAT if the economy sinks into recession this winter (we think GDP will muddle along at about 2% growth, thanks to massive monetary and fiscal stimulus). But whether it’s mediocre growth or no growth, Trump won’t be happy — he wants growth of between 3% and 4%, and that isn’t going to happen.
SO WE THINK TRUMP WILL KEEP POWELL into early 2020, while constantly ranting about the Fed (he said yesterday that the central bankers are like children). He will need to blame somebody or something for a mediocre economy. As the election campaign heats up, we think Trump will seek to remove Powell as Chairman, making him a mere governor — prompting Powell to resign in protest.
THE FLAW IN THIS SCENARIO, OF COURSE, is that the FOMC is hardly monolithic; even with Powell gone, several members may be reluctant to cut rates aggressively. A rate reduction seems likely in late July (the markets are counting on it), but what if the labor market stays strong, stocks are in record territory, high tariffs bring inflation, etc.? Another rate reduction (or two) later this year could become less likely, especially if there’s progress on trade talks with China.
TRUMP IS SO DETERMINED TO GET LOWER RATES — AND A WEAKER DOLLAR — that he’s willing to risk a sharp market blowback (and an inflation threat) if he interferes with monetary policy. Actually, the markets already have done the heavy lifting, driving the Treasury 10-year bond yield down to 2%; Trump should be thrilled.
OUR SENSE IS THAT POWELL is determined to maintain the Fed’s integrity, but he’s in uncharted waters because of tariff wars that have battered U.S. businesses and farmers. The longer trade wars persist, the more likely the Fed will have to stay accommodative — Trump surely knows this, so why should he be in a hurry to conclude the trade talks?
STILL ANOTHER POLICY WILD CARD for Powell to ponder will be this fall’s looming debt ceiling crisis — still another headwind for the macro economy. While a government default is very unlikely, the markets and consumers will hear plenty of warnings that it’s possible. And progress on a budget has been so glacial this summer that there will be speculation about still another government shutdown this fall.
THE FEDERAL FUNDS RATE probably will be 50 basis points lower by early next year, but that won’t be enough for Trump. He’s already made up his mind to fire or demote Powell — the only question is when. We’re betting on mid-winter at the latest.
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