Can Trump Push Jerome Powell Out of the Fed? w/WSJ's Nick Timiraos
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Last week, headlines sword about whether Donald trump will try to fire fed chair to own power today. To answer this question, i'm here with nick timorous of the wall street journal to talk about whether that's possible, how this might play out and the future of the fetal serve.

His friends, it's dave you're listening to on the market the real state news and economic shows for informed real state investors. Let's get into my conversation with that.

Dick, welcome back to the show. Thanks for joining us.

Thanks for having me.

So you're here and i'm GTA ask many questions about the future of the fed, but maybe can help bring us up to speed. We all know that there was a fed meeting right after the presidential election. They caught the federal funds rate by twenty five basis points. But what else happened in the last meeting that I and our audience?

Well, I think the big question right now is, you know, is the economy going to avoid a recession? And if so, the bond market thinks so. And so you've seen yields, right? I mean, it's unusual, right? The first cut now seven, five basis points this year and you've seen that ten year treasury year to go up.

I don't know a half point um probably not what a lot of people expected. And so I think the big question now is you know what what happens from here, both on the policy side donnot trumps policies are a little bit unclear exactly how far he's gonna on tar of tax cuts, spending cuts, regulatory rollback. What does that mean for growth? What does that mean for inflation? There's gonna a lot to digest.

Got a yeah, just to be clear, whatever what next talking about here, we've seen that the fed has cut you first fifty basis point half a percentage point back in september that we had a quarter point cut here in november. But at the same time, mortgage rates have gone up for all of us in the housing market. And that's because fed doesn't control market market rates that is much more closely tied to the bond market.

And when the bond market believes that there is less risk of a recession, bond yields usually go up and take mortar rates up with them. Just a quick primer on why marker drays have have gone up in the last couple of months. Now nick, know obviously, we're going to be pack as some of the stuff that you talked about in terms of policy. But after every fed meeting, there is a press conference that some of us pay a lot of attention to. Did draw pile in this press conference giving the indication for what the fed might do in the coming months or .

should we be expecting more rate cuts in the expect to keep cutting rates. And so pal repeated that view. I think in terms of the economic outlook, maybe the most interesting thing, power said, was around the forecast for inflation because inflation is looking maybe a little bit firmer than expected.

And peel said that they still expect inflation to come down because what they really see right now is the former Prices are an echo of past strength in the economy. They don't see new sources of heat. If you think about a fire, they don't see the fire reheating sort of on its own here.

They think these are catch up increases in places. And what would be an example of that? You know, your car insurance premium has gone up because car places went up a lot two and three years ago.

It's not that, that there is something new that's running through the economy. These are sort of the echoes of earlier present the crisis. And so if that's your story on inflation, then that is just less concern that you would have to do something different from interest strates from what you were expecting.

The fed said they were going to cut interest strates. You stop think conflation is coming down, then you're not gonna react maybe quite so much to these a little bit stiffer than expected inflation readings. okay.

So still you know we still have to see what happens. I think there's one more meeting this year in december, so we will see what happens there. But IT seems like the general consensus is still at the fed intends to cut rates and get to a lower federal funds rate in the next couple of years.

We just don't know exactly when and how rapidly those rates might come, at least that's that's the last thing that we've heard so far. Now of course, we all like you know sort of speculating and want to know what's going to go on with the fed because he does have big implications for the economy and for the housing market. But there's sort of this other story line that's been going on since the presidential election. And you actually, nick wrote about this in the wall street journal, sort of about the future of the federal reserve and whether or not how might be staying in his position. So can you just give us a primer on that situation?

Yeah you know power was a made feed chair initially by Donald trump in twenty. Of course, trump showered fairly quickly on his selection uh, because the fed was slowly raising interest strates at that time. And trump didn't think that inflation was a problem that needed to have kind of proactively higher interest strates.

The fed stopped raising interest strates and actually cut a little bit in twenty eighteen because of some concerns that a global growth was slowing, inflation was not picking up. And so, you know, there had been questions over whether trump could fire the fed chair. He had sort of vented to his advisers in two thousand hundred and fifty.

I don't like this power guy. I'm stuck with them, you know, can I get rid of them? And they told him, no. They said, there is a four year term for the fed chair. He also has a fourteen unior term as a governor that the felder's reserve act, which created the fed, says that you can only replace a governor, a fed governor for cause and that's been interpreted by a court to mean malfeasance and propriety you know, in competence, not just I don't like what they goes doing with interest rates.

Okay, so dont trump losers in twenty twenty a biden comes in, biden reappoints power in two and the the concern that you know, the fed there will be fired to sort of over until, uh, you know, don't trump comes back and people begin to ask him, what are you going to do with the fed? Would you try to replace power? Now what trump said this year is, no, I would try to replace him as long as he's doing the right thing, which is sort of an interesting condition to, and not an unconditional pledge as well.

The current situation, things seemed fine. You know, I will point out, trump has been very clear that he regards inflation as a serious problem. He called in a country bosses that you have to fix inflation, but at the same time dont.

Trumps always prefer both interest strates. So a number of people have been asking, well, what trump decide to try to push power out again if he thought maybe the fed wasn't cutting interest strates fast enough, or he just wanted to have his own person in there. And there are some people in the president orbit, you know, allies of the president, who have been saying, no, we really think you could get this guy out if you wanted to.

There are other people around the present who think that's a horrible idea. I should say, the president elect who who think this is a horrible idea. You don't want to do this. You don't want to mess with the fed right now, especially when bond markets are kind of looking ahead and sing, wow, deficits are a lot higher than they were four years ago. Inflation has been a problem, so you start to interfere with independent monetary policy and you might not like what the bond market does all right.

time for a short break, but will be back with nick tomorrow. Fed independence and how to trump power relationship might look right after this.

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Everyone, welcome back to the show. I do want to ask some questions just about the legality of all this, but maybe we should just talk about independent monetary policy. You just stays at that. And you know the feds are of Operates in this this area, right? You know the fed governors and the chair are pointed by the president.

They are not elected officials, but they sort of have had historically this space where they don't need government approval for their decisions, right? So in drone pal, in the rest of the fed governors decide to change interest strates the federal funds rate. They don't need approval for the president or from congress.

right? That's right. It's a very a pecus set up because Normally, I mean, you wouldn't take a committee of tax experts and say you guys are in charge of tax policy.

You go decide how much. I think those are very political decision. So why is IT that when we talk about independent monetary policy, why why do we have that? Well, first of all, what is independence?

I mean, I think sometimes can get over talked um to mean that you know nobody can ever second guess the fact what IT really means as they have some degree of Operational autonomy. Congress and the executive branch set up the fed and over time decided the fed should set interest strates with an eye towards keeping inflation law and stable. They call that Price stability and then maximum employment, or I would call that a solid, a good labor market outcome.

You wants to baLance those two goals and sometimes they're in conflict. But we're going to that the fed figure out how to do that with really one instrument, which is interest rates. So they have the autonomy to do that.

And why do they have that? Well, a couple reasons. One is that we've found through history that when you let political factors dictate what should happen with interest strates, I mean, you're always politicians always want to win the next election. So you'll always sort of accept some stimulus today.

And if IT overheat the economy, I if you have a bit more inflation, well, that's okay because will take that risk and you want to have an independent central bank to come and say, actually know um we need to make sure that inflation doesn't get out of control. That's what happened in the one thousand seventies. And so after that, central banks around the world, sort of far for more autonomy or independence and governments gave IT to him because he seemed like a worthwhile trade off.

The other reason, I think we have this arrangement where central banks enjoy more independently. Frankly, congress doesn't want to make these decisions to raise interest rates. They're unpopular, their difficult decisions. And so they're able to blame the feed.

They're able to say, well, i'm not the one that made you more create or you're alone rate go up, you know the fed did this and so you can sort of blame the ed there. They become a convenient scapegoat for political purposes. So you is not written in stone anywhere that the feed should be independent and sort of a norm that has developed over decades really, uh, with some trial and air. And so that's why we have the system and arrangement that we have.

Now that's a great explanation. Thank you. Neck and IT makes clear some of the arguments for fed independence. Like you said, it's a convenient political scape goat is one reason and you know, IT might help mitigate the political short term thinking by either party. But what are some of the criticisms of fed independence?

But I think the critics move that is why do you have this? You unaccountable and very powerful institution and I mean, this is how I I believe trump thinks about IT is he owns that if the economy doing well or if it's not, you know, people are going to hold him accountable. So why should he have more say over what this very important, a interest state setting body is doing with policy? You know, his advisers said to me when he was present, he doesn't really understand this fetish around fed independence.

He thinks that if the feed is doing the wrong thing, he should be allowed to say IT for thirty years before trump was president, there had been this soft norm, uh, really begun by bill clinton and then continued by George job, bush barabara, that the president wasn't going to go on monetary policy. And the reason clinton did this, he had an economic advisor who later became treasury secretary, bob rubin. Bob rubin had been at the top of goldman sex, and he had seen how a George h.

Job, you bush, in nineteen ninety one and nineteen ninety two was in a fight with the fed. He was arguing that the fed should cut interest strates more and the fed didn't always go along. And so Robin saw this and he said, well, this exposed how weak actually bush was.

Um you create concerns in the market that the feed is not gonna be as focused on inflation that can send interest rates up. You also fight with the fed and you lose IT shows that your week so he went and said, the White house was not gonna k about military policy. No donor trump decided he should be allowed to have to say, because he thought all of these guys are rarely throwing IT up.

Somebody needs to stop them. A one final point on this is, you know, the fed does try especially compare to thirty years ago. You know, part of defending their independence is being more transparent about what they are doing and why.

And so that's what you see all of the speeches and you they released the minutes, they released the transport ript verband transcripts of their meetings i'll be at with a five year lag. But they're trying to show people that you know this isn't some uh, political Operation that they are running. They actually are informed by what they think is the best thinking and analysis, and they try to a justify their decisions. And so that sort of A A way to guard against the risk that, well, this is just an unaccountable fourth branch government, and we should wipe this away.

You've told us a bit about how president elect trump thinks about fed independence. But what do other politicians think about this? How is fed independent generally seen in .

washington? Well, you know, up until recently, at least senate republicans, when I would talk to, you know, members of the senate banking committee, which is the committee that has restriction over the fed, they were quite supportive of fed independence, and they were certainly support above.

At the last time on a trump's president, once he realized he didn't like what he was getting from the fed, he began to suggest nominees who he thought would be more loyal to him. And some of these nominees were seen as not terribly qualified by senate republicans, and they resisted. I think the bid question going forward is, you know, are things different now? Trump seemingly has a broader political Mandate.

Then he did eight years ago when he was elected. Uh, so do senate republicans push back on this more or do they say, you know, if trump points his way with the fed, he's the president he's entitled to IT. But generally, the senate has been sort of a ball work to support this idea of having a more independent monetary policy.

And does that go for the business community as well?

I think so I mean, I think we haven't really run the experiment here. What happened if you had a fed that maybe was seen as more responsive to political factors? I should note some people think the fed is very political and that they take politics into account in everything they do.

If you talk to people who are former festivals, they completely, you reject that idea. But you know, these are difficult economic judgments are making. Well, tax rates boost growth without inflation.

Will deficit spending boost growth without inflation? If not, do you have to raise interest strates? You know, you can kind of divorce those from whatever you think about what taxes are spending due to the economy. So there there's always going to be some room for interpretation.

Let's get back to where we are today. Obviously, trump was elected just a couple weeks ago, and there has been more speculation recently about whether trump try to fire power right away or he'll ask him to step down. But from what I trump actually isn't suggested that he's going to fire power or ask him to step down.

Is that right? That's right. okay. So is the new renewed speculation basically just based on things that happened back in twenty eight?

I think it's a part of that. And it's also the fact that you you ve had some advisers around trump arguing for a more muscular executive branch. You I think the reason you're seeing the questions now after Donald trump's election is people wanted know where are the guard rails going to be in a second term so they're asking these questions, you know do not trump what you try to replace paw. He has not said that he would. And people are going to ask the future the same thing.

And how has Powell responded to those questions?

Pows responded to those questions exactly the same way that he did five years ago. He said five years ago that he has a four year term as chair and he intends to serve IT. And he was extremely direct, uh, at the press conference in early november when he was asked, do you think the president has the authority replaced you? IT was a one word answer. no.

We actually pulled the audio of that interaction. Here's the clip. Some of the presents advisers have suggested that you should resign. Um if he asked you to leave, would you go no ah can you follow up on IT is if do you think that legally he did you're not require to leave?

no.

Do you believe the president has the power to fire or demote you? And has the fed determined the illegality of a president demoting at will any of the other governors with leadership positions not permitted under law, not let, not permitted under the law? Alright, super interesting.

Thank you, nick. So IT seems like pal is pretty dug in serving out the rest of his term. So how how might this play out? Decay won't ask you to predict the future, but what are some of the possible scenario from here?

Well, I think the main scenario is that pologies serves out his charm. IT ends in may of twenty twenty six. And so, you know, that's seventeen months of the next four years of trump.

Uh, I think that is the base case scenario. Could trump changes mind and decided do something? Of course.

So what would happen in that scenario mean if you want to go into that kind of yp themal rabbit hole? Well, one scenario that trumps advisors flow at last time was okay. The law says you can't fire him as chair.

And, you know, his advisers told him last time you can do this. And you know, I reported recently that that in two and eight and nine, when they still become an issue, powl told treasure secretary Steven manucho. I will fight this.

You need to know that I will fight this if people want to make an issue of this. And of course, trump didn't fight IT, right? He later tells power in a phone call. He described this phone call to some other people.

He said that he had told pal, I guess i'm stuck with you and so even though trump talked a lot about potentially replacing pole, he never did IT um and it's possible he never did IT because he knew that there would be a legal fight that that would be very disturbing of markets potentially. And so his advisers had come up with this. I D A, well, you can't fire him, but maybe you could demote him as the chair.

Why would you do that? Well, the law that creates the chairs for your term is silent on the four cause removal protection that the governors have. So there are some people who said, well, maybe you could just demote him and then could you elevate somebody else into the chair?

Seems like a lot of effort to do that for just again, you know, of a sixteen or seventeen months term that power has left. And then if you look at different court rulings and opinions from supreme court justices, a number of them have sort of said they see the fed is different, the monetary policy, the history of the fed and the predecessor institution, the second bank of the us. Create some reason to think that maybe the supreme court would rule in favour of the federal power on this. But I will stipulate you, we're talking about sort of extreme tail risk pytheos here.

yes. So that sounds like the most likely scenario is that trump and power find a way to work together for the fifteen or sixteen months, as you said, of trump second term. And then trump, correct me from drunk and he could name his new chairperson. But does that chairperson have to come from the existing fed governors? Or would he be able to appoint someone completely new?

I'll be able to appoint someone completely new because the way the fed governor seats workers, one of them turns over every two years. So in january twenty twenty six, one of the current fed governors, her turmoil expire, Adriana callers, turmoil expire. And so on february first, twenty twenty six, truck will be able to put somebody knew into that job.

And that's about four and a half months before powers term as chairs up. So presumably whoever gets that seat could become the chair four months later. And if anybody else on the fed board retires early, uh, maybe they take you know a fed governor, Mickey bomb, and and make her the head of a right bank regulatory agency that would give you another vacancy to fill on the board.

But know this is a difference from eight years ago. In terms first term moni took office, there were a lot of vacancies on the board. He had an opportunity early to remake the fed. He had up to five vacancies in his first thirteen months. And this time, if everybody stays and nobody leaves early, he'll only have one vaccine in the first two years.

right time for one final break. But stick with us more on the future of the fed and how different scenario might affect the market. On the other side.

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Welcome back, confessors. Let's jump back again. okay. So of course, no one knows what's going to happen. But that sounds like the most probable scenario again is that trump power choose to work together for the first twelve, sixteen months. And if at that point, trump is unhappy with the direction of the fed, he'll have the option to came a new fed governor who could then be appointed by trump to be the chairs percent of the fed and assumability. That person would have monetary policy inclinations that are more aligned with president like trump. And so sounds like, nick, you believe that's more likely because rather than sort of go through this potential legal battle, that trumps have a chance to name a new fridge chairman anyway within the first two years of his second term yeah.

that's right now you'd go through potential legal battle. The market might react very badly. I mean, economists actually think this know before a court would even pick up up the market would react in such a way that everybody would reconsider whether you really wanted to go kind of the nuclear option here in the courts.

No IT would pretty be harmful for everybody involved. IT be a lose lose for the fed, even if you won this decision. I mean, I think people have said to me what, why? Why is power? Why would power be so committed to this as a kind of personal ambition? And the answers know this is about defending a principle of central bank independence.

If power were to resign at the president asking, you'd establish a new norm that the feed your answers to the president. And if the president doesn't like the monetary policy he's getting, then you just replace the feed chair. Uh, that would be a completely different turn from the central bank that we've had for the last fifty years, sixty years native.

This is possible that trump powder actually more aligned than people think there because we have just talked about that the fed intends to keep cunning rates. Trump said that he'd like lower rates. So is IT possible that they are actually trying to do the same thing?

IT is possible. I mean, the feds goal is to have the soft landing, right? To have inflation come down without a downturn.

It's what we've seen signs of happening this year. I think the chAllenge here is that trumps policies, it's very hard to know how to model them. As a couple examples, regulatory rollback. You could see that is something that might help with, with inflation because your increasing competition, you're making a possible for the productive capacity of the economy to produce more goods and services. So that could be disinflationary tax cuts.

How much growth do they create? Are you increasing deficits? And are you going to have to, you know, compensate investors more to buy a treasury security, to buy a treasury bond that could cut IT in different ways? Terriers, I think, are a wild card. There is an argument that, you know, even if terrace increased Prices, they only send up the Price once inflation isn't a one time increase in the Price level. It's a year after year increase.

So the question right now is with the fed, how would they react to one time increase in a tear, what you allow a Prices to go up once and then say we're not going to try to offset that with title monetary policy because that could create a slowdown that you don't think is necessary if you don't think inflations going to be a problem. Or you know, there is a world in which officials concluded we just went through these inflationary shocks. Now consumers have become accustom to inflation.

Unions are bargaining for higher wages when Prices go up that maybe a different inflationary environment we could be in where the fedex they have to raise rates. If cfs go up, there would be something that I would think the trump administration would be quite frustrated about. So it's just it's a little bit like shaking episode bottle and trying to predict how much is gonna come out when you open the lid, how quickly you open the lid.

There are different forces. And I think model trumps economic policies for the fed. It's just gonna a more chAllenging.

Thank you so much, nick. Although we don't know exactly what's going to happen, one thing has been made clear as that is going to be very news worthy and event full year for the fed. And we will be certain to keep our audience here posted about any news that impacts the economy and the housing market. Thanks so much for joining us today. Thanks for having me.