Whither the Fed?
The uncertain implications of Trump's blinkered attempt to prosecute the Federal Reserve chair.
Almost from the very day he nominated Jay Powell to be the Federal Reserve chair in 2017, Donald Trump has been champing at the bit to fire him and replace him with someone more pliable. During his first term Trump talked a good game about getting rid of Powell — and Powell would respond by basically shrugging his shoulders and going about his job.
During the first year of his second term, Trump has made similar noises. This time around, however, he has also taken some actions to bolster his words — such as attempting to fire Federal Reserve Governor Lisa Cook and confirm his own sycophants to the Federal Reserve Board.
Trump’s efforts to oust Powell campaign escalated quickly this weekend, according to the New York Times’ Glenn Thrush and Colby Smith:
The U.S. attorney’s office in the District of Columbia has opened a criminal investigation into Jerome H. Powell, the Federal Reserve chair, over the central bank’s renovation of its Washington headquarters and whether Mr. Powell lied to Congress about the scope of the project, according to officials briefed on the situation.
The inquiry, which includes an analysis of Mr. Powell’s public statements and an examination of spending records, was approved in November by Jeanine Pirro, a longtime ally of President Trump who was appointed to run the office last year, the officials said.
The investigation escalates Mr. Trump’s long-running feud with Mr. Powell, whom the president has continually attacked for resisting his demands to slash interest rates significantly. The president has threatened to fire the Fed chair — even though he nominated Mr. Powell for the position in 2017 — and raised the prospect of a lawsuit against him related to the $2.5 billion renovation, citing “incompetence.”….
Prosecutors in Ms. Pirro’s office have contacted Mr. Powell’s staff multiple times to request documents about the renovation project, according to an official with knowledge of the investigation who discussed an open inquiry on the condition of anonymity.
Asked about the inquiry, Mr. Trump told NBC News that he had no knowledge of the U.S. attorney’s investigation. “I don’t know anything about it, but he’s certainly not very good at the Fed, and he’s not very good at building buildings,” he said.
This time around, Powell is not shrugging his shoulders. He responded with a video statement on Sunday evening that — by Fed discourse standards — was defiant:
The key portion of Powell’s statement:
I have deep respect for the rule of law and for accountability in our democracy. No one—certainly not the chair of the Federal Reserve—is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.
This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress’s oversight role; the Fed through testimony and other public disclosures made every effort to keep Congress informed about the renovation project. Those are pretexts. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.
Powell is not the only one who is upset about this latest attempt by the Trump administration to prosecute their way into getting what they wanr.
Of course, the question is how seriously to take this threat. As the Times story notes, “Starting an investigation is one matter, presenting sufficient evidence to secure an indictment from a federal grand jury — or making it stick — is another.” Grand juries have been unpersuaded by Trump’s more vindictive efforts at prosecution. Even the relatively Trump-friendly members of the Supreme Court have stated that Fed independence is important. The court has not taken too kindly to Trump’s efforts to fire Lisa Cook.
So what will happen? How will markets react? The hard-working staff here at Drezner’s World believes there are several ways of looking at this latest effort by Trump to weaken Fed independence.
