Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Stock Market Due for 9-10% Pull Back? - 25th April 19
Dow Transportation Stocks Sector Is Testing Resistance - 25th April 19
INSOMNIA i64 UK Best Games Festival Vlog of What it's Like to Attend - 2019 - 25th April 19
In Just 45 Mins., Learn to Spot New Opportunities in ANY Market for FREE! - 25th April 19
If This Pattern Holds True, the US Economy Could Face the Worst Stagnation in History - 25th April 19
8 Reasons Why Investment in Education Always Pays Off - 25th April 19
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

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

© 2005-2019 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

6 Critical Money Making Rules