It’s time for Jay Powell to become Jerome Powell

On July 31 President Trump effectively hijacked U.S. monetary policy-making from the Federal Reserve Board and cut the discount rate by 25 basis points, to a range of 2.00-2.25 percent. This cut drove most interest rates down, most notably mortgage rates. And he is likely to do this again, when the Federal Reserve Board meets in September. Trump is managing to do all of this without even being present or voting at the meeting. 

This was the culmination of a long process, begun last year, when the president began to criticize Jerome Powell, whom he had chosen to be chairman of the Federal Reserve Board, when he nominated him for the position in November 2017.

Since then the president has publicly regretted choosing Powell for the position and said the Fed was “too aggressive,” “ridiculous,” and “loco” in setting interest rates too high. He also stated that the economy would have grown through the roof had the Fed cut rates instead of unchanging or hiking them. 

Despite this, the Fed did not give in, though it mis-stepped in December 2018 and hiked rates by 25 basis points. It asserted its independence and its data-driven monetary policy. In response, the president escalated his attack. In summer 2019, he declared his intention to slap tariffs on an additional $300 billion of Chinese goods. This worked like magic on the Fed. 

The president achieved the rate cut he wanted and will garner another one in the near future, perhaps as early as next month. If necessary, he will use the same strategy next month too: declare another round of tariffs against China to force another cut.

This amounts to an abdication of responsibility by the Federal Reserve Board and its chairman. 

Its July rate reduction was not warranted by the economic data at hand, as inflation and unemployment rates were extremely low. What these data warranted was either leaving the discount rate unchanged or hiking it. Instead, President Trump induced a rate cut, which Chairman Powell justified as insurance against the possible negative impact of tariffs and slowing economies abroad.

But the Federal Reserve Board is not in the insurance business. Congress created it in 1913 to make monetary policy that assures low inflation and low unemployment, amounting to economic growth, which can increase social happiness and stability. Fearing that such a critical mandate could be politicized, Congress designed it as an independent body. 

This is no longer the case. President Trump showed that the Executive Branch can effectively turn the Fed into a political body and make monetary policy to serve the presidency. This, of course, changes the balance of power among the three branches of government and would likely lead to congressional action.

The Fed must extricate itself from the presidential grip and regain its independence by the way it works and communicates. Though it has become a bit more communicative and open in the past year, it is not enough—not with this unprecedented grip. The Fed could, for example, pre-empt the president by offering the Executive Branch periodic meetings the way it has with Congress. Such meetings would reduce the likelihood of an open rift with and manipulation by the president.

The calculus of Trump in all of this is clear and simple, the way it had been for all sitting presidents in recent history, especially when they seek reelection: to effect a friendly monetary policy, that is, a policy of low and declining interest rates and low unemployment. This policy translates into growing paychecks and 401K accounts for voters and results in winning a second term. 

In Trump’s, the calculus to win reelection includes not only the effects of low interest and unemployment rates, but also a tariff agreement with China in a strategically beneficial time for his reelection to almost guarantee him a second term.

It’s high time for the Fed to reassert its independent authority to make monetary policy that will serve the whole country. This requires a stronger backbone and more assertive communication. 

Otherwise Congress will have to step in to reexamine and possibly reconfigure the mandate it had given the Federal Reserve Board back in 1913. 

It is time for Jay Powell to become Jerome Powell.

Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico, and his book about stagflation, “Marketing in a Slow-growth Economy,” was published by Praeger Publishing.