President Donald Trump is undermining the economy with his attacks on Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System.
Over the past few days, Trump has called for Powell and the other members of the Federal Open Market Committee, which conducts monetary policy for the United States, to cut interest rates. On Monday, Trump increased the pressure on Powell and the FOMC with a post to social media claiming that the economy will slow down “unless Mr. Too Late, a major loser, lowers interest rates NOW.”
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Trump’s Monday tirade accelerated a bad day for U.S. equities. The S&P 500, the benchmark equity index for domestic stocks, fell precipitously following Trump’s comment. The index had been trading at about 5,225 when Trump let loose. After that, the index fell another 100 points, almost 2%. Equity and other domestic financial markets, including U.S. Treasuries and the U.S. dollar, have confidence in Powell.
Markets know that Powell will focus on his dual mandate, which is legislatively prescribed: full employment and low-contained inflation, which is defined as 2% inflation as measured by the personal consumption expenditure price index. By contrast, markets believe that Trump would sacrifice long-run price stability to mitigate the economic pain of his tariff policies, creating the conditions for a global trade war.
Trump understands that his tariffs disrupt economic activity in the U.S. and abroad. He knows that most economists have sharply raised the risk of recession because of his economic agenda. Trump wants lower rates now to lessen those risks, but recent data show the economy is not rolling off a cliff. Both the Federal Reserve Bank of New York and the Federal Reserve Bank of St. Louis project first-quarter GDP growth above 2.5%, significantly higher than the long-term average for U.S. GDP growth.
Moreover, the weekly unemployment data and March retail sales indicate that the economy is very healthy. In other words, the most recent data do not show signs of a recession.
In turn, Powell and the FOMC have no justification for lowering rates now, especially as inflation remains above the 2% target. Powell has a legislatively mandated responsibility to follow the data and not bow to the whims of a politician. The rule of law matters. So does history.
In the 1960s, Fed Chairman William McChesney Martin Jr. cut interest rates when the economic data indicated otherwise. President Lyndon B. Johnson physically assaulted Martin, and the rest is history. The inflation genie was let out of the bottle, and inflation was not quelled until future Fed Chairman Paul Volcker aggressively raised interest rates and engineered a deep and painful recession.
The current Fed chairman does not want to repeat the history of acceding to the demands of a sitting president. Trump probably could remove Powell from office and appoint a more pliable chairman, but that would involve a long legal battle that would only be resolved by the Supreme Court. The legal battle by itself would further unsettle financial markets.
If Trump wants to improve the economy and restore market confidence, he should look not at Powell but in the mirror. After all, his economic policies to date have damaged the economy. Treasury yields have increased, raising borrowing costs for the federal government. Servicing the large federal deficit is more expensive. And of course, higher interest rates slow economic activity.
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Trump is between the proverbial rock and a hard place. He knows his policies are disruptive, but financial markets will rebel if he tries to force Powell out. The risks of a recession will increase.
Trump, by nature, is not patient, but he will just have to wait for the data. Until the economic information provides clear evidence that the economy is slowing, and with inflation above the 2% target, Powell and the FOMC will maintain interest rates at their current levels, as is their duty as stewards of the economy.
James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].