“I think the law is clear that I have a four-year term, and I fully intend to serve it,” said Federal Reserve Chairman Jay Powell at Wednesday’s semi-quarterly press conference, when Washington Post reporter Heather Long asked him what he will do if the president announces on Twitter that he intends to demote Powell from the Fed chairmanship.
Trump has been upset because the Fed has not been cutting interest rates like he wants, and Bloomberg News reported Tuesday that Trump had asked White House lawyers to investigate the legally dubious idea of removing Powell from the Fed chairmanship before his term ends in 2021.
But while the Fed didn’t change its interest-rate policy today, Powell and his colleagues sent pretty strong signals they probably will do so soon. Today’s “dot plot,” in which participants on the Federal Open Market Committee provide their expectations about future interest-rate policy, shows that 8 of the 16 FOMC participants believe a rate cut will be warranted by the end of the year. Only one participant wants to raise rates this year. This is a big change from three months ago, when zero FOMC participants were calling for a cut in 2019 and six thought a rate hike would be appropriate.
Even the eight FOMC participants who aren’t yet writing down that they want a rate cut in 2019 have shifted their views in a dovish direction, according to Powell, who said they see that the case for a rate cut is stronger than it was weeks ago. Some things have changed in the last few weeks: Weaker global economic data and a worsened outlook in global trade negotiations are factors that increase the likelihood that the economy will need a boost from interest rate cuts; and a weakened outlook for inflation reduces the risk that rate cuts will lead to excessive inflation.
Given that negative economic news, and the president’s impatience, why not cut rates now? Powell said the Fed wants to watch a little longer and ensure the trends it’s reacting to are real and persistent. Markets nonetheless reacted today to Powell’s signals about likely future Fed action, with stocks going up and bond yields going down. The clear expectation of market participants is the Fed will cut rates when it next meets in late July.
Powell studiously avoids talking about the president, and he has a sensible argument that actual economic changes warrant a more dovish shift by the Fed, regardless of what the president is saying. As I wrote two weeks ago, some of the changes to the economic environment are being caused by the president: While Trump does not appear to have strong, direct political influence over the Fed, he does have an ability to influence Fed policy by taking actions that influence the economy or the financial markets. If the president makes trade announcements that reduce stock prices and discourage business investment, he may increase the likelihood of rate cuts.
One key question then is what will happen if the president backs off his actions that have roiled financial markets. Effectively, the Fed has been put in a position where economic conditions will soon merit a rate cut, because the expected trade deal with China is not materializing, which is negative for the economy. What if Trump goes and cuts that deal with China after all? That could push stock prices up and stimulate business investment, reducing the need for the Fed to cut rates. But if the Fed decides circumstances have changed again and a rate cut won’t be merited in 2019 after all, market participants are likely to be surprised, and the president is sure to be upset.