the top line

Trump’s Attacks on Jerome Powell Show He Doesn’t Know How the Fed Works

Trump with new scapegoat Jerome Powell. Photo: Andrew Harrer/Bloomberg via Getty Images

Like Treasury Secretary Steven Mnuchin, I mistakenly assumed this would be a light week in financial news. I, too, am currently at a beach resort in Mexico.

And so as the Treasury secretary calls bank CEOs from the pool to check whether they face any liquidity issues (is that what anyone was worried about before Mnuchin brought it up?), I will make my attempt, mai tai in hand, to convince the president to stop encouraging the stock market to shit itself.

If I could tell Donald Trump one thing about the economy, it would be this: Federal Reserve Chairman Jerome Powell does not set interest rates. So, stop fantasizing about firing him, because even if you could do so, that wouldn’t stop rates from going up.

Short-term interest rates are set by the Federal Open Market Committee (FOMC). This committee consists of the chairman of the Federal Reserve Board (Powell), the other members of the board (up to six in addition to the chairman, though currently two of the seats are vacant), the president of the Federal Reserve Bank of New York, and four presidents of the other 11 regional Federal Reserve banks, who serve on a rotating basis.

People tend to talk about Fed chairs “making” monetary policy because they are the public faces of the Fed and because they have a great deal of influence over the FOMC’s decision-making. But they cannot act without the support of the committee. And because the Fed is most effective when it can give clear guidance about its future actions, the FOMC places a high value on consensus and unified action. It’s not like a legislature where you can assemble a bare majority and rule with an iron fist; for a green-eyeshade institution, it’s surprisingly kumbaya.

So, suppose Trump got rid of Powell. He’d be left with a FOMC whose consensus perspective on monetary policy still calls for rate hikes — which is why it’s been raising rates to begin with.

The regional Fed bank presidents are even more insulated from the president than Powell and the other Fed Board members are. Not only can the president not fire them, he doesn’t even choose them; they’re picked by boards of directors, accountable only to the banks supervised by the regional Fed banks and to the Fed Board of Governors.

For example, the president of the Federal Reserve Bank of Boston is chosen by a search committee that includes the president of Boston Medical Center, the president of Brown University, and the CEO of Legal Sea Foods, a Boston-based restaurant chain. They, not Trump, are who Eric Rosengren has to worry about if they go on television and whine about rates being too high.

Some of the regional Fed presidents are more hawkish than Powell (such as Esther George from the Kansas City Fed), and others lean in a more dovish direction (Rosengren, for example, and Neel Kashkari of the Minneapolis Fed), but on average they’re pretty much in line with him.

If the president really wanted a more dovish FOMC, he should have made Kashkari its chairman instead of Powell. Kashkari even has the right political credentials, having been the Republican nominee for governor of California in 2014. But Trump did not make his picks for the Fed Board with an eye toward low rates. In addition to Powell, Trump named three of the other sitting members of the Board. They have supported Powell’s rate-hike campaign.

And this, I think, is what gives up the game. While Trump is apparently raging about his desire to take Powell off the Fed, he’s declined to do the thing he could do to actually move the Fed — put people on it who would move it in a more dovish direction on rates.

What this tells me is he mostly sees Powell as a useful scapegoat: Even if he has no intention of firing him, he finds it convenient to blame Powell for poor stock performance. The problem, as the president is learning, is that bashing the Fed chairman isn’t just a way to deflect blame for falling stock prices. It causes stock prices to fall.

Attacks on Jerome Powell Show Trump Doesn’t Understand Fed