Isn’t Flinching

Why Powell Isn’t Flinching At Trump’s Attack

If markets really think the Fed is going to base policy on the president's whims rather than what’s best for the economy, it could cause a financial bloodbath.

By Victoria Guida

Sunday and Monday were two of the wildest days of President Donald Trump’s long crusade against Federal Reserve Chair Jerome Powell, second only, perhaps, to the first time he made clear he wanted to fire him back in December 2018.

Seven years later, it’s remarkable how much has changed. The Fed chief, who has doggedly avoided engaging with Trump amid an endless string of criticisms, finally reached his limit. On Sunday night, he directly accused the president of wielding a criminal investigation as part of his pressure campaign for lower interest rates.

Markets, which cratered in 2018 on the prospect that Trump might try to fire Powell, shuddered a bit at the news that the Justice Department had served the central bank with subpoenas but took it in stride. At this point, threats against the Fed feel more routine, as investors I spoke with on Monday made clear.

There is one notable parallel, though: Both times, Republican lawmakers voiced rare disagreement with Trump with an eye toward insulating the Fed from political pressures that could damage the U.S.’s financial standing and stoke inflation.

Here are some of the biggest takeaways from this latest twist in the saga:

Powell still thinks he holds a lot of cards (and he seems to)

Powell’s Sunday night statement got a lot of attention not only because it’s a break from his past habit of avoiding any overt mention of Trump’s broadsides, but also because, generally speaking, others in powerful positions (CEOs, lawmakers, law firms, etc.) have not been so publicly and directly confrontational on matters where they disagree with the president.

Powell, in a video message, did not mince words: “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,” he said.

Part of the reason why he’s emboldened to do this is evident in what came next. Gold soared and the dollar fell, both indications of rising worries about Fed independence, and GOP lawmakers started to speak up in his defense. Administration officials, including Trump himself, distanced themselves from the probe.

Sen. Thom Tillis (R-N.C.), who sits on the Banking Committee that vets nominees to the central bank, said he would oppose any Fed candidate “until this legal matter is fully resolved,” signaling potential trouble for a soon-to-be-named Fed chair. House Financial Services Chair French Hill (R-Ark.) called Powell “a person of the highest integrity.” Sens. Dave McCormick (R-Pa.) and Kevin Cramer (R-N.D.) both said they didn’t think the Fed leader was guilty of a crime.

The Supreme Court also seems interested in preserving the central bank’s autonomy. The justices went out of their way in an unrelated case last year to suggest that the Fed has special legal status, perhaps in anticipation of an adverse market reaction to their move to reduce the political independence of other regulators.

Of course, that brings us to the most significant source of Powell’s power: If markets really did think the Fed was going to make policy based on the whims of the president rather than considered judgments about what’s best for the economy, it would likely be a financial bloodbath.

But for now, Fed independence seems alive and well.

This works against Trump’s own interests

Both within and outside of the central bank, one of the main conclusions was that this makes Powell more likely, rather than less, to stay on as a regular governor after his chairmanship ends. His term on the Fed board runs until 2028, and the Trump administration would much rather have another ally in that seat.

People close to the Fed chief, who at times exudes mild burnout, had previously put heavy odds on him leaving after May, but that probability has dropped in the wake of the president’s actions.

Another of the takeaways I have is that, if this has any effect on monetary policy at all, it might require more evidence that additional rate cuts are needed for the Fed to pull the trigger. The central bank, for market credibility reasons, does not want to appear to be caving to Trump.

Also, this kind of pressure may make it more difficult for Trump’s future Fed chair nominee to get confirmed.

The focus of the investigation is murky

Though the scope of the DOJ’s probe is not entirely clear, the Fed chief disclosed that the administration is looking into his testimony to Congress last June about renovations to the Fed’s headquarters, where the costs have ballooned to more than $2 billion.

A reading of the public record suggests the kind of things we’re talking about here is whether Powell lied when he said there were “no rooftop gardens” when there will in fact be “vegetated roof spaces,” according to documents the Fed submitted to the National Capital Planning Commission.

Of course, the investigation might also cover the cost overruns themselves, as Trump suggested just a couple of weeks ago that he might sue Powell for “gross incompetence.” But mismanaging a project is not in and of itself a crime.

The more mild nature of those accusations likely contributes to doubts about the administration’s motivations.

This raises the stakes in the Cook case

The Supreme Court is set to hear oral arguments on Jan. 21 on Trump’s bid to fire Fed board member Lisa Cook, based on allegations that she committed mortgage fraud — claims she has contested. Part of the reason why it was hard to gauge the consequences of the DOJ probe is that we don’t yet know the conclusion of that case.

If the justices rule that the president has a significant amount of latitude in firing Fed officials “for cause,” a statutory standard that has never before been litigated, it could spark a market reaction because investors aren’t expecting a blow to Fed independence.

The notion that Powell’s job might also be on the line could amplify that effect.

On the question of what comes next, the ball is in the judiciary’s court.