Trump’s attacks on Powell threaten the Fed’s independence. Here’s why it matters

WASHINGTON AP Donald Trump has stepped up his attacks on Federal Reserve Chair Jerome Powell at the same time that the Supreme Court is considering a episode that could make it easier for the president to fire him The developments are occurring against a backdrop of wider turmoil in the business sector and financial markets brought on by Trump s sweeping taxes on imports Majority of economists worry that an assault on the Fed s longstanding independence from politics would further disrupt markets and add to the uncertainty enveloping the financial sector In comments at the White House Thursday Trump suggested he has the power to remove Powell and criticized him for not aggressively cutting interest rates If I want him out he ll be out of there real fast believe me Trump announced I m not happy with him All the scrutiny threatens the Fed s venerated independence which has long been supported by bulk economists and Wall Street investors Here are specific questions and answers about the Fed Why does the Fed s independence matter The Fed wields extensive power over the U S market system By cutting the short-term interest rate it controls which it typically does when the commercial sector falters the Fed can make borrowing cheaper and encourage more spending accelerating increase and hiring When it raises the rate which it does to cool the economic system and combat inflation it can weaken the business sector and cause job losses Economists have long preferred independent central banks because they can more easily take unpopular strategies to fight inflation such as raise interest rates which makes borrowing to buy a home car or appliance more expensive The importance of an independent Fed was cemented for the greater part economists after the extended inflation spike of the s and early s Former Fed Chair Arthur Burns has been widely blamed for allowing the painful inflation of that era to accelerate by succumbing to pressure from President Richard Nixon to keep rates low heading into the electoral contest Nixon feared higher rates would cost him the voting process which he won in a landslide Paul Volcker was eventually appointed chair of the Fed in by President Jimmy Carter and he pushed the Fed s short-term rate to the stunningly high level of nearly It is right now The eye-popping rates triggered a sharp recession pushed unemployment to nearly and spurred widespread protests Yet Volcker didn t flinch By the mid- s inflation had fallen back into the low single digits Volcker s willingness to inflict pain on the business activity to throttle inflation is seen by majority of economists as a key example of the value of an independent Fed What do Wall Street investors think An effort to fire Powell would almost certainly cause stock prices to fall and bond yields to spike higher pushing up interest rates on executive debt and raising borrowing costs for mortgages auto loans and credit card debt Largest part investors prefer an independent Fed partly because it typically manages inflation better without being influenced by politics but also because its decisions are more predictable Fed personnel often publicly discuss how they would alter interest rate policies if economic conditions changed If the Fed was more swayed by politics it would be harder for financial markets to anticipate or understand its decisions So does that mean the Fed is altogether unaccountable Well no Fed chairs like Powell are appointed by the president to serve four-year terms and have to be approved by the Senate The president also appoints the six other members of the Fed s governing board who can serve staggered terms of up to years though majority governors leave before the end of their terms Those appointments can allow a president over time to significantly alter the Fed s policies Former president Joe Biden appointed five of the current seven members Powell Lisa Cook Philip Jefferson Adriana Kugler and Michael Barr As a conclusion Trump will have fewer opportunities to make appointments He will be able to replace Kugler who filled an unexpired term ending Jan Congress meanwhile can set the Fed s goals through decree In for example Congress gave the Fed a dual mandate to keep prices stable and seek maximum employment The Fed defines stable prices as inflation at The law also requires the Fed chair to testify before the House and Senate twice every year about the economic system and interest rate agenda But can the president fire Powell Powell says the law establishing the Fed does not allow a president to fire a chair except for cause There is particular complication in that Powell was separately appointed as a member of the Fed s board of governors and then elevated to the position of chair by Trump in Most of legal scholars agree that Trump can t fire Powell from the Fed s board of governors but there is less agreement over whether a president can remove him as chair In January Michael Barr who was vice chair for supervision stepped down from that post but remained on the board to avoid a foreseen legal clash over whether Trump could fire him Should Trump try to fire Powell anyway the ensuing fight would almost certainly end up at the Supreme Court What could the Supreme Court do We may get an early sign of how the Supreme Court would decide it this summer There is already a development before the court on the issue of whether the president can fire top agents at independent agencies The situation stems from Trump s firings of two leaders one from the National Labor Relations Board and the other from an agency that protects workers from political interference The Supreme Court last week let the firings stand while it considers the situation It could rule this summer that the president as the head of the executive branch could fire bureaucrats at any federal agency even if Congress had intended it to be independent The affair would overturn a -year old precedent known as Humphrey s Executor in which the court ruled that the president couldn t fire such functionaries Powell declared Wednesday he is watching the development closely adding that it might not apply to the Fed Lawyers for the Trump administration seeking to narrow the focus of the affair have argued that it doesn t involve the Fed Both the Trump administration and the Supreme Court justices have carved out exemptions for the Fed before In February the White House issued an executive order that placed several financial regulatory agencies including the Fed and the Securities and Exchange Commission more directly under the president s control Yet the order specifically exempted the Fed s ability to set interest rates from that order And in a development in Justice Samuel Alito disclosed in a footnote that the Fed is a unique institution with a unique historical background that made it different than other independent bodies If the court does give presidents more power over the heads of independent agencies it could potentially exempt the Fed Source