Federal Reserve Board Chairman Jerome Powell speaks during a news conference yesterday in Washington, DC. The Fed raised short-term interest rates by a quarter percentage point as expected yesterday, with market watchers expecting one more increase this year and three more in 2019. - AFP
FEDERAL Reserve leaders for the past quarter-century have made decisions about interest rates without being pressured by the president.
President Trump has broken that streak, calling the central bank “crazy” for raising rates and more than once saying the Fed is damaging the economy. That has prompted Fed Chairman Jerome Powell to update playbook rules for dealing with a president annoyed by America’s central bank.
Rule 1: Speak not of Mr. Trump.
Rule 2: When provoked, don’t engage.
Rule 3: Make allies outside the Oval Office.
Rule 4: Talk about the economy, not politics.
The first rule has led to awkward silences, blank stares and uneasy laughter. At an October lunch with economists in Boston, Mr. Powell spoke enthusiastically about the team he assembled at the Fed, said a person who was there. When the subject turned to Mr. Trump’s criticisms, Mr. Powell sat expressionless, saying nothing.
The rules are simple but not easy, given the relentless criticism. Mr. Trump blamed the Fed for October’s stock-market selloff, calling the central bank “out of control.” The president told The Wall Street Journal Oct. 23 that Mr. Powell seemed to enjoy raising rates.
Not since the 1990s has a president leaned so hard on the Fed chief and never so publicly. On Monday, Mr. Trump told the Journal: “I think the Fed right now is a much bigger problem than China.”
During an appearance with Mr. Powell this month, Dallas Fed President Robert Kaplan hinted at Mr. Trump’s litany of harsh words without naming the president.
“One of the questions from the audience is, ‘Gee, I read in the newspaper that you have been mentioned by political leaders over the last several months,’ ” Mr. Kaplan said, triggering awkward audience laughter.
“That was very delicate, Rob,” Mr. Powell interjected, returning to Rule 1.
Then Mr. Powell pivoted to Rule 4—stick to the economy. Low unemployment and stable inflation were his sole focus, he said: “We don’t try to control things we don’t control. We try to control the controllable. We’re just trying to do our jobs. And, you know, we’re doing fine.”
The Fed’s benchmark interest rate is now in a range between 2% and 2.25%, well below long-run averages. The central bank is expected to raise rates by a quarter-percentage-point at its Dec. 18-19 meeting.
Mr. Powell says he is raising rates to return them to a more normal setting and avoid the type of boom-and-bust economy that ended in past recessions.
The president hasn’t complained directly to Mr. Powell. The two men haven’t had a substantive conversation since Mr. Trump introduced Mr. Powell as his pick to be Fed chairman last November.
Mr. Trump has said he doesn’t plan on firing Mr. Powell, and it isn’t clear he could. The Federal Reserve Act states a Fed governor can be removed only for cause, a high bar that courts and legal scholars have interpreted to mean malfeasance or neglect.
The Fed’s policy moves reverberate around the world, influencing the decisions of businesses and consumers by shaping the cost of credit and the values of stocks, currencies and real estate.
The stakes are higher than a few individual interest rate increases. The Fed’s credibility could suffer if investors believe its commitment to guard against inflation has been compromised by politics, or if Mr. Trump’s attacks sour the public’s view of the central bank.
“At some point, it becomes very damaging to the institution to be perceived as not acting in the best interest of America,” former Fed Chairwoman Janet Yellen said in an interview.
Mr. Trump’s pressure is making it harder for Mr. Powell to conduct policy without markets inferring that politics have entered the equation.
When Mr. Powell made comments Wednesday that sounded to some investors like the Fed might not have many more rate increases to go, markets rallied—and some wondered, with no evidence, if Mr. Trump’s attacks were starting to sway the Fed leader. Mr. Powell’s conduct so far suggests that is unfounded, and people close to him strongly dispute that notion.
This article is based on dozens of interviews with lawmakers, current and former officials from the Trump administration and the Fed, as well as business leaders. Mr. Powell—who joined the Fed board in 2012, nominated by President Obama—declined an interview request.
Mr. Powell has told others that he knows the president’s criticism could make his life unpleasant, but that he wouldn’t respond to political pressure. People close to Mr. Powell said he understood that history would judge him on policy decisions made over his four-year term.
His political headaches may swell faster than the economy next year as Mr. Trump prepares to run for re-election. The central bank anticipates growth in the economy to slow, while rates are expected to continue rising.
Business as usual
Mr. Trump has said he supports central bank independence but is entitled to making his opinions known. Managing presidential opinions has long been part of the Fed leader’s job, but one conducted mostly in private.
President Lyndon B. Johnson once summoned Fed Chairman William McChesney Martin to his Texas ranch to berate him for raising interest rates, saying it was despicable, according to Mr. Martin’s account.
One low point for the central bank came when President Richard Nixon privately pressured Fed Chairman Arthur Burns to keep rates low before the 1972 election, according to Oval Office recordings. Mr. Burns kept rates low and inflation accelerated.
Shortly after President Ronald Reagan’s inauguration, a White House staffer asked Fed Chairman Paul Volcker if he wanted to host the new president at the Fed. Mr. Volcker declined, but replied he would be happy to meet the president anywhere else. They settled on the Treasury Department as a neutral ground.
Top Reagan administration officials frequently criticized Mr. Volcker, who presided over rate increases that triggered recessions in 1980 and 1981. But President Reagan refrained. “He just never did it,” Mr. Volcker said in an interview last year.
President George H.W. Bush’s Treasury Secretary Nicholas Brady cut off regular breakfasts with Fed Chairman Alan Greenspan to show his disapproval of tight-money policies in 1992. Mr. Brady stopped inviting Mr. Greenspan to dinner parties and golf dates at Augusta National.
One of Mr. Brady’s deputies at the time was Mr. Powell, who served as an appointee in the Treasury’s domestic policy office. Mr. Powell, 65, graduated from Princeton and Georgetown University law school.
In 1994, President Bill Clinton was upset that Mr. Greenspan’s rate increases threatened a delicate deficit-reduction plan that Mr. Clinton had guided through Congress.
Mr. Clinton’s unhappiness “never was communicated to me,” said Mr. Greenspan, who added he heard about it much later. Economic adviser Robert Rubin convinced the president it was best to lay off the central bank to show investors that the Fed was apolitical.
That practice held through two administrations, until Mr. Trump decided this year to raise a ruckus about the Fed.
While Mr. Trump complains loudly, his top economic advisers conduct business as usual with Mr. Powell; that includes Treasury Secretary Steven Mnuchin, National Economic Council director Lawrence Kudlow and Council of Economic Advisers chairman Kevin Hassett.
Mr. Kudlow and Mr. Powell have bonded over their back troubles. Mr. Powell shared the name of his doctor, “who’s been a terrific help to me,” Mr. Kudlow said in an interview. “I’m not kidding.”
Before he became chairman, Mr. Powell was the Fed’s point person on bank regulation, just as the Trump administration took shape. That put Mr. Powell in regular contact with Mr. Mnuchin, a newcomer to Washington. Mr. Mnuchin later backed Mr. Powell for the chairman job.
Mr. Trump has since taken out his frustration on Mr. Mnuchin, according to a person familiar with the matter, saying recently, “I thought you told me he was going to be good.”
Messrs. Powell and Mnuchin meet for breakfast or lunch roughly every other week, alternating between Mr. Mnuchin’s offices at the Treasury and a fourth-floor wood-paneled suite in the Fed’s main building.
After Mr. Trump publicly complained about Mr. Powell this summer, Mr. Mnuchin said in a TV interview that he was “a phenomenal leader at the Fed.”
Mr. Powell and other Fed governors continue a longtime practice of meeting once a month with top economists at the Council of Economic Advisers. Participants say conversations focus on the economy and how the U.S. might respond to economic crises abroad. Mr. Powell avoids discussing the president’s criticism, according to people familiar with the matter.
Mr. Trump’s advisers don’t see the president’s attacks as helpful, according to people who have spoken to them.
In fact, Mr. Powell is the kind of Fed leader the White House wants, Mr. Kudlow said, because he is skeptical of traditional economic models that say inflation rates rise when unemployment falls.
With an unemployment rate of 3.7%, near a half-century low, traditional models suggest the Fed engage in aggressive interest-rate increases. Mr. Powell, who isn’t a trained economist, views the models with greater skepticism than some macroeconomists.
He has moved interest rates up slowly, waiting to see how inflation responds before deciding if rates should go higher.
“Jay is questioning a lot of the traditional Fed dogma with the board staff and their models,” said Mr. Kudlow.
Mr. Trump’s economic advisers have helped Mr. Powell cement control of the central bank, securing a cast of Fed deputies and governors who appear to be allies. All three rate increases this year have passed by unanimous vote of the Fed’s rate-setting committee.
The president, on the other hand, sees no reason to continue with rate increases because inflation is modest, he has said. He wants rates low to foster fast growth.
Inflation in the U.S. has returned to the Fed’s 2% target after running below it for several years. Tax cuts and federal spending increases are stimulating economic growth at a time of very low unemployment, creating an economic experiment unparalleled during a peacetime expansion in the postwar period. Fed officials are watching closely because the combination can push inflation to undesirable levels.
Several people who know Mr. Trump say his long career in real estate informs his view of rising interest rates, which have put a damper on his businesses. Mr. Trump’s firms sought bankruptcy protection after borrowing costs rose in the early 1990s and in the mid-2000s.
Mr. Trump told the Journal in October the Fed chief has surprised him, because he thought Mr. Powell was a “low interest-rate guy.”
Making friends
Mr. Powell, a Republican and Washington native with a 40-year career spanning government, finance and law, recognizes that Fed authority depends more on Congress than the White House.
“Our decisions can’t be reversed by the administration,” Mr. Powell said earlier this month in Dallas. “Of course, Congress can do whatever it wants.”
The financial crisis badly damaged the central bank’s aura of technocratic acumen, and unpopular bank bailouts prompted Congress to limit the Fed’s emergency lending authority.
Many Republicans opposed former Fed chief Ben Bernanke’s unconventional Fed policies to stimulate growth. Lawmakers proposed legislation that would give Congress the authority to audit the central bank’s policy decisions, which Fed officials strongly opposed.
After becoming the Fed chairman in February, Mr. Powell turned his attention to Capitol Hill. In his first eight months, he met with 56 lawmakers—32 Republicans and 24 Democrats. During her first eight months as Fed chairwoman, by comparison, Ms. Yellen met with 13 lawmakers.
Sen. Chris Coons (D., Del.) came away impressed from a private meeting with Mr. Powell in October. He said the Fed chief wasn’t interested in talking about tension with the White House. Mr. Coons and Sen. Jeff Flake (R., Ariz.) later decided to send Mr. Trump a letter telling him to lay off the Fed.
“You appear to be telling the Fed what to do with interest rates, which we believe is unconstructive and dangerous,” the senators wrote the president.
In his new memoir, Mr. Volcker described how White House chief of staff James A. Baker III, with President Reagan watching silently, ordered the Fed chairman not to raise interest rates before the 1984 election.
Mr. Volcker, who wasn’t planning to lift rates anyway, didn’t tell colleagues or lawmakers about the episode. Mr. Baker has said he didn’t recall that.
After watching Mr. Powell’s most recent public appearances, Mr. Volcker sent him a congratulatory note, “which I never do,” he told the Journal.
“He handled himself very well,” Mr. Volcker said. “I told him so.” - WSJ
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