Is Jerome Powell repaying Donald Trump for not reappointing Janet Yellen?

The world was surprised when Donald Trump once again broke tradition by not reappointing Janet Yellen as the Chairperson of the Federal Reserve Board. Traditionally, the Fed Chair serves for two terms, and partisan politics are put aside for those appointments. Obama reappointed the Republican Ben Bernanke, just as Clinton renominated Alan Greenspan.

This nonpartisan approach to the Federal Reserve has been of huge benefit to the United States. Alan Greenspan is largely responsible for the long period of growth and stability in the 1990s, as well as the soft landings after 9–11 and the implosion of the Long Term Capital Management fund. Ben Bernanke is probably singularly responsible for helping the United States avoid a full-fledged depression in the wake of the 2008 financial crisis.

Janet Yellen was widely respected. She had been Ben Bernanke’s Deputy during the height of the financial crisis, and she continued his aggressive policies to help the economy recover after his retirement. Even Trump admitted he liked her and liked her policies. Unbelievably, a new report says he decided not to renominate her due to the fact that she’s short.

More likely Trump decided not to renominate Yellen due to the fact that she had originally been an Obama appointee. Like everything else that Obama did, Trump is against it. For example, Trump killed the Trans Pacific Partnership negotiated by Obama only to have his new economic advisor Larry Kudlow suggest that such a deal was a good idea.

It does raise eyebrows, however, that since replacing Yellen with Jerome Powell, Trump has repeatedly tweeted criticisms of his policies. In particular, Trump is outraged over Powell’s repeated interest rate hikes. Powell has taken these steps because of concerns over inflation, especially in light of the Republican tax cut which took effect when the economy was already at essentially full employment. In Trump’s view, however, these rate increases have stood in the way of further economic growth. To Trump, of course, everything is personal.

Powell had signalled that due to the tax cut, further interest rate increases would likely be needed well into next year. Suddenly, yesterday, he reversed course, stating that the rate increases may stop. Nothing in our economy’s fundamentals has changed since he announced his earlier policy, so it begs the question, why the sudden shift?

The Fed is supposed to be independent, above politics, much like a court. Indeed, it is arguably as powerful or more so than the Supreme Court. Up until now, Fed governors have maintained an admirable level of apolitical professionalism, developing policy based upon data with the joint aims of keeping inflation and unemployment low.

This arrangement works well for the politicians in Washington. Oftentimes, they know that the economy is getting overheated and that inflation is a risk, but they are afraid to say so publicly for fear of alienating supporters. But by giving this responsibility to the independent Federal Reserve Board, they can be assured that the difficult tasks that are necessary to manage our economy can be taken without fear of political reprisals. In public, politicians may wring their hands about the Fed’s independence, but it works to everyone’s advantage.

That all changed with Trump. When he declined to reappoint Yellen, he signalled that politics would now govern that decision. My fear is that Powell has gotten that message, and Trump’s tweets have shown the President’s displeasure with Powell’s handling of the Fed. If Powell is bowing to Presidential pressure, then, Fed independence is at risk.

If the Fed loses its independence, who will be there to take the difficult and often unpopular steps that are necessary to steer our economy for the long term? Who will be there to save institutions that, often due to their own irresponsible behavior, threaten to damage the economy as a whole? Who will be there to step in when our economy faces collapse and Congress is too busy with politics to do anything?

I certainly hope that something has appeared in the data to prompt Powell’s change of direction. Otherwise, Trump will have succeeded in destroying another of the institutions that are so important to the long-term health of our democracy.

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