President Trump has already won his argument for loosening Federal Reserve policy. While Fed Chair Jerome Powell can boast all he wants about the sanctity of the Fed’s independence, the fact is he and his FOMC followers knuckled under to the pressure Trump – and the financial markets – exerted on them to call a halt to any more interest rate increases for a while. Indeed, the discussion has since moved to cutting interest rates, a thought that seemed unimaginable just a few months ago.
Back in October, we were talking about how many rate increases we could expect this year. Now that any rate hikes are basically off the table for the foreseeable future, according to the Fed, the talk has shifted to a potential rate cut, possibly before the end of this year.
So why can’t Trump be satisfied with that? Instead, he’s sabotaging his chance to fill the two remaining seats on the Fed’s board of governors by publicly considering two people – Herman Cain and Stephen Moore – both of whom have way too much political baggage to hope to be confirmed, never mind actually nominated (remember, Cain was never formally nominated before he withdrew, nor has Moore).
While Fed independence is certainly a noble idea, the fact is that every person considered for the board has some political taint to them, expressed or not. Otherwise, they wouldn’t have been nominated in the first place. We all need to realize that and not try to pretend otherwise. Jerome Powell was nominated by Trump because he’s a Republican, while his predecessor, Janet Yellen, was nominated by President Obama because she’s a Democrat. Simple and reasonable.
Unfortunately for Trump – at least in his mind – Powell has proven to be a disappointment because he had the audacity to raise the federal funds rate a few times against the president’s wishes. Yet, in the past few months, Powell has shown himself malleable, changing Fed monetary policy on a dime when Trump and Wall Street began complaining vociferously that higher rates and a smaller Fed balance sheet were hurting the economy (Trump’s biggest concern) and asset returns (Wall Street’s only concern).
Yet, fresh from what should be considered a victory, Trump wants to double down and pack the Fed with people without any pretense that they’re not there to carry water for him. You’d think that Trump would be a little more subtle about this, but then again that’s never been his strong suit.
It’s not clear what doomed Cain more – his outspoken support for Trump’s plan to bend Fed policy to his will, or his alleged past indiscretions with women. Probably 50-50. Moore has the exact same problem, although his issues with women seem to have more to do with what he’s written about them (he doesn’t like women’s basketball) rather than any actual physical transgressions (at least none that have been reported).
While I’m certainly sympathetic to the idea that we need more actual business people – and fewer economists – on the Fed, there certainly must be some sober-minded, competent men and women out there who don’t bring such baggage and blatant sycophancy with them. Whether or not they will pass muster with Trump, I suppose, is another matter.
I actually have two such recommendations, although they will mean that Trump will have to fill the vacancies in his administration they will create.
I’m speaking, of course, about moving Treasury Secretary Steven Mnuchin and Larry Kudlow, the director of the National Economic Council, to the Fed.
While Mnuchin has occasionally run afoul of the president – Trump blames him for recommending Powell – he has managed to generally avoid controversy and done a good job in a very high-profile position. Not many Trump cabinet members can say that or have lasted so long. Kudlow has also been a good soldier while retaining his likeability across the aisle, no mean feat in today’s poisonous political atmosphere.
While Mnuchin and Kudlow may not be realistic choices, there are certainly plenty of other capable and noncontroversial people who would be excellent choices. Last I checked, most of the companies in the S&P 500 have a retired CEO. Probably very few of them are trained economists, but most of them presumably know how to run a company. That seems like a reasonable qualification to join the Fed.
It remains to be seen, however, whether Trump can be steered away from his worst instincts and nominate someone who stands a chance of being acceptable – to Congress, the financial markets and American consumers and taxpayers. That will be the biggest hurdle of all.
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INO.com Contributor - Fed & Interest Rates