President Trump/Federal Reserve Chairman Powell Feud

This developing story may have already changed by the time you read this.

The next few days will reveal more inflation and employment numbers. These reports are instrumental in the Federal Reserve’s decision to effect change in interest rates, among other tools to promote financial stability.

So far, the Federal Reserve has resisted President Trump’s proddings, threats and even childish name calling of Fed Chair Powell to lower interest rates, although it is amusing on some twisted level.

As a quick background, the independent Federal Reserve, headed by Chairman Jerome Powell, has 12 voting members from around the nation who serve on the Federal Open Market Committee. They help set crucial monetary policy, meaning, in other words, interest rates. Simply put, the higher the interest rates, the more banks reel in money supply and inflation would naturally lower as it becomes harder and more costly to borrow money. Lowering interest rates would create the opposite effect of increasing money supply, but would fuel inflation.

The current inflation rate is trending down at about 2.4% in July, according to the Bureau of Labor Statistics. This rate has slightly decreased from 2.9% in June. The Fed’s long-term target is 2% and virtually all Fed members are aligned with a ‘wait-and-see’ approach to react to inflation data before making any changes. To date, they see no reason to lower rates as inflation is gradually attaining their goal without causing a recession. Employment numbers also validate their stance. They are especially reluctant to lower rates given the Trump tariffs issue, expecting prices to soar when exorbitant duties are imposed. Americans will be paying more for effectively everything and inflation may well surge. A lower interest rate would only fuel that fire.

President Trump, however, wants to lower interest rates by an unheard of full percentage point. He says it would be economic ‘rocket fuel’, attracting businesses to the U.S. and uplifting the economy to levels never seen before.

There are two schools of thought as 1) Trump’s push to lower rates, which would encourage bullish, record-breaking tendencies on the stock market, and 2), the temperance of Fed Chair Powell’s resistance, putting the brakes on inflation.

Pick your poison, as they are mutually incompatible.

Now, as much as Trump wants Powell out, there are consequences to removing him from office. Deutsche Bank pegs the probability of an ouster at only 20%. But given the Fed Reserve’s latest reports of the Fed’s headquarters renovation overruns, the Trump Administration may have the tools with which to expedite Powell’s removal. Meanwhile, in a most inopportune time, Powell acknowledges the excessive costs to renovate the central bank’s aging building, and disputes the reports as “flatly misleading.” The heat is on.

Either way, Powell’s term expires next May but if he is prematurely, unexpectedly replaced, despite the latest Trump promise to remain independent, bank on the U.S. dollar dropping, possibly several points. The greenback would hold a persistent risk premium that investors would grow anxious about, as this move would be a direct affront to the Fed’s independence, putting the central bank under extreme institutional duress. The consequences of Powell’s ouster could reverberate far beyond the U.S. borders.

Long-term investors may be adversely affected, at least on the foreseeable short-term.

Short-term day traders would ride the wave and continue to make money on a daily basis.

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By the way, the irony of the Trump/Powell feud is that Fed Chair Powell was appointed on February 5, 2018 by none other than… wait for it… President Trump!

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