Pressure from President Trump to cut interest rates, which could buoy both the economy and his chances of reelection in 2020, won’t affect the Federal Reserve’s decision on the matter, central bank Chairman Jerome Powell promised senators on Thursday.
“It’s critical that the public understand that we are always going to do our work objectively, based on data, with transparency,” said Powell, who has been the target of repeated barbs from Trump after the Fed raised interest four times since his appointment as chairman. “We’re going to do what we think is right for the American economy.”
It was a position Powell made clear repeatedly during two days of semiannual Congressional testimony in which he fielded questions spurred by Trump’s attacks and the president’s threats to remove him as chairman.
Republicans and Democrats alike pointed out that the early 20th century law establishing the central bank designed it to foster stable economic growth independent of influence from the legislative or executive branches.
“It’s important that the Federal Reserve remain insulated from political pressure,” Sen. Pat Toomey, a Pennsylvania Republican, told Powell during Thursday’s session before the Senate Banking Committee. “I think you’ve done an outstanding job.”
Sen. Robert Menendez, a New Jersey Democrat, pointedly inquired as to whether Trump’s “attempt to intimidate you into taking certain actions” has contributed to volatility in financial markets and declining confidence, a query Powell declined to answer.
Told last year that he lacked the power to fire Powell without cause, Trump has instead subjected the central bank to an ongoing tongue-lashing, while praising European Central Bank President Mario Draghi’s willingness to stimulate the trading bloc’s economy. The Fed “doesn’t have a clue,” the president has said, and if it did, it would cut rates from the current range of 2.25% to 2.5%.
That would give the U.S. a level playing field in Trump’s trade wars with nations such as China, which relies on its central bank to limit the fallout of tariffs, the president has said.
….As well as we are doing from the day after the great Election, when the Market shot right up, it could have been even better – massive additional wealth would have been created, & used very well. Our most difficult problem is not our competitors, it is the Federal Reserve!
— Donald J. Trump (@realDonaldTrump) July 6, 2019
Powell, of course, doesn’t set interest rates alone. Those decisions are made by the Federal Open Markets Committee, a panel that Powell chairs which includes all Federal Reserve Board governors — a full complement would be seven — as well as four seats that are rotated between presidents of the regional Fed banks and a fifth held by the president of the New York Fed.
Arrangements to insulate the Fed from political pressure “have served the public and the economy well over time,” Powell said. “What we see in countries and in eras in the U.S. when those protections are not in place is bad outcomes.”
In the late 1960s and early 1970s, the Fed — under pressure from President Richard Nixon, who was seeking a second term — lowered interest rates and was blamed for runaway inflation later.
“It was a failure of the Fed to do what needed doing,” Powell told senators. Paul Volcker, the Fed chairman appointed in 1979 by President Jimmy Carter, “came in and did it,” he added, raising short-term rates to a high around 20%. “It was incredibly unpopular, as you’ll recall, but it really put the U.S. in a great place for a long period of time.”
The chairman’s comments, including a statement that the monetary policy committee would raise interest rates if economic data indicated it was necessary, reinforced his remarks to the House Financial Services Committee a day earlier.
“If you got a call from the president today or tomorrow and he said, ‘I’m firing you, pack up, it’s time to go,’ what would you do?” U.S. Rep. Maxine Waters, the California Democrat who chairs the panel, asked during the earlier hearing.
“Of course, I would not do that,” Powell replied, reiterating that the law gives him a four-year term and he intends to complete it. “My answer would be no.”
That doesn’t, however, signal that the Fed won’t lower interest rates. The central bank has indicated a growing willingness to do that since June, citing low inflation, global trade tensions, and potential fallout from Great Britain’s thorny departure from the European Union.
Trading in interest-rate futures tracked by CME Group’s Fed Watch Tool indicates a 22% chance the monetary policy committee will lower rates 50 basis points — twice the typical move — at its July 31 meeting and 78% odds it will cut them at least 25 basis points.
