How Jerome Powell can save the Fed from Trump

 In Politics

WASHINGTON, DC - NOVEMBER 02: Jerome Powell, U.S. President Donald Trump's nominee for the chairman of the Federal Reserve, looks on as President Trump speaks during a press event in the Rose Garden at the White House, November 2, 2017 in Washington, DC. Current Federal Reserve chair Janet Yellen's term expires in February. (Photo by Drew Angerer/Getty Images)

Jerome Powell, President Donald Trump’s nominee to chair the Federal Reserve, is both a Republican and an Obama appointee. | Drew Angerer/Getty Image

Powell is expected to remain a firm advocate for Fed independence, though Mnuchin backed him as a pick over whom he hoped he could exert some influence.

Updated


Jerome Powell, President Donald Trump’s nominee to chair the Federal Reserve, faces multiple risks as he prepares to take stewardship of the economy. Among the biggest: the threat of being publicly criticized by the president himself.

The Fed zealously guards its ability to make monetary policy decisions free from short-term political pressures, a key feature of its structure. But the president has already proved willing to buck tradition by targeting the central bank, and its chair, in the bluntest terms on the campaign trail.

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“She’s very political, and to a certain extent, I think she should be ashamed of herself,” Trump said of Fed Chair Janet Yellen in a CNBC interview in September 2016. During a presidential debate that same month, he accused Yellen of artificially propping up the economy with low rates.

Now, with the economy showing new strength and stocks hitting record highs, if a Powell-led Fed responds by accelerating interest rate hikes, the president could be provoked to speak up again. And Powell would have to rely on his relationships on Capitol Hill, as well as with Treasury Secretary Steven Mnuchin, to help ward off any such attacks.

Since Trump’s election a year ago, the Fed has grappled with the possibility that the president could publicly criticize the central bank, plunging it into an uncomfortable political spotlight.

“The Fed needs a good reputation, and its credibility matters,” said Sarah Binder, a political science professor at George Washington University.

“If you have criticism coming in from Trump and coming in from Congress, … there will always be questions about whether the Fed will succumb in any type of way or be diverted from its policy prescriptions,” she added. “That makes it harder for monetary policy to work.”

Certainly, the central bank’s best defense against attacks is to keep the economy on an even keel. But if conditions turn sour over the next few years — a real possibility given that the current expansion is already the third-longest in U.S. history — the Fed would be an easy target. And the president hasn’t shied away from criticizing even his own appointees, as Attorney General Jeff Sessions and others have discovered.

If the president is unhappy with the Fed’s performance, he could also use additional appointments to shake up the central bank.

As a result, the Fed spends considerable energy figuring out how to stay out of politics and preserve its independence.

Its ability to do so will soon sit squarely on the shoulders of Powell, who will not only have to guide decisions that affect the economy but also defend them to Congress and the public. His confirmation hearing before the Senate Banking Committee is set for Tuesday.

While Trump criticized the Fed more stridently than any major presidential contender in modern history, congressional Republicans have taken aim at the central bank for years. One GOP lawmaker says the key is for the chair to convey his intentions effectively.

“The better the Fed communicates its policy trajectory, both to the public and to Congress, the more it is going to be able to achieve that independence that many Fed officials want,” Rep. Andy Barr (R-Ky.), who chairs the House Financial Services subcommittee on monetary policy, said in an interview.

Powell is both a Republican and an Obama appointee, providing him with bipartisan support that might help fend off threats to the central bank. A member of the Fed board since 2012, he’s more sympathetic to Republican calls for a simpler rulebook for banks yet also more in line with Yellen on interest rate policy.

He also comes into the job with a fair amount of relationships on the Hill already; between January and September, he met with 13 senators and multiple House members. And since his nomination as chair, he has had a flurry of additional conversations.

“I think very highly of Jay,” Barr said. “He and I have gotten a chance to know each other through an informal breakfast meeting and other meetings in my office.”

Still, although criticism from the president could undermine public support for the institution, the bigger worry for the Fed is the potential for those criticisms to carry over to congressional action.

The central bank is perpetually involved in a delicate dance with Congress. It has the freedom to set interest rate policy as it sees fit to achieve the dual goals that Congress has given it: price stability and maximum employment.

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