🔋Selective Independence
The reason Trump wants to fire Fed chair Jerome Powell is not what you think.
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Trump wants Federal Reserve Chairman Jerome Powell out. He has been publicly critical of the central banker and voiced his desire for the Fed to lower interest rates. Another radical president, FDR, tried to fire the US Federal Trade Commission (FTC) in the early 1930s (Humphrey's Executor v. US). The Supreme Court ruled that the president only has the power to fire executive officers, not those leading independent agencies that engage in regulation and adjudication.
That brings us to today, given that the Federal Reserve is an independent agency. While true independence can be argued to great success in my opinion, the theory is that if the appointee cannot be fired by the president, they achieve independence. Even though Trump was the one to appoint Powell in 2017, he is now trying to get him fired. The problems are the 1935 Supreme Court ruling forbidding him to do so and Powell’s reluctance to voluntarily step down.
Recently, Trump fired the two democratic commissioners on the FTC and signed an emergency petition to grant the power to fire two other independent agencies. This will be an important ruling, upholding Humphrey's Executor v. US or overturning it. Overturning would grant Trump the power would likely also give him the authority to fire Powell.
What caused Trump to change his mind on Powell? Amidst sticky inflation, the Fed has been hesitant to cut interest rates. Cutting interest rates is seen as stimulating to the economy as businesses and consumers can take on loans at cheaper prices. The Fed’s job is to maintain target employment and inflation, in which that mandate comes “from the people,” in Powell’s words. Their real job is to keep orderly financial markets, keep banks and the government properly liquid and funded.
Trump is correct when he claims the Fed is usually late to cut interest rates. Typically, financial markets have already “broken” before the Fed steps in. This means either banks failing, recession, or both. People tend to think cutting rates is stimulative for the economy, but it comes with a lag. The stock market historically sees its worst returns when the Fed is cutting rates. So does Trump think he knows more than the Fed and that the agency should act to help preemptively avoid recession?
For the first time in decades, we have a president concerned about the fiscal deficit. Lower interest rates, especially long-duration treasury bonds, would help reduce the debt refinancing burden of the United States in future years. Interest expense has skyrocketed to over $1 trillion per year through interest rates set by the Fed. While this has the effect of lowering balance sheet expenses, it is not the main mechanism to lower the US debt.
There are a few ways to reduce the debt, which include fiscal austerity (DOGE, lower interest rates), increasing taxes (Tariffs), increasing productivity (lower interest rates, trade deals), and financial repression. The first three are the advertised benefits under a Trump administration. Unfortunately, DOGE will not find much success on this front as I’ve written previously, and Tariffs are doubtful to be the income generator that they are claimed to be.
Financial repression is the most effective debt-reducing method, used to great success after WWII when debt/GDP was also over 100%, like it is now. Financial repression is the pernicious game in which inflation runs higher than the return on government treasury bonds. If you buy a risk-free bond that returns 5% each year, that may sound very attractive. However, if inflation is running 10% per year, you are losing 5% each year in real terms. Those holding the bonds are the suckers that pay for the reduction in US debt.
By convincing Powell to lower interest rates, Trump can claim he is ushering in fiscal austerity measures and stimulating the economy, which are positive for the nation. He cannot say that he is advocating financial repression, which would bring about negative real interest rates. You can’t tell someone you are taking advantage of them and expect them to continue to accept it, so the gaslighting ensues.
While this game is going on, Trump is playing a tricky game with tariffs. As I discussed last week in Not Your Dollars, if tariffs scare foreign nations or tariffs reduce the trade deficit, capital is withdrawn from the US capital markets. This has the effect of lowering demand for US stocks and bonds and could have the unintended consequence of upward pressure on US bond prices, which is not what Trump wants. If there is not a giant foreign bid for US treasuries, then the Fed would likely have to perform more quantitative easing to support the US government by adding treasuries to its balance sheet to keep bond prices high and interest rates low.
In financial repression, bonds and cash are one of the worst places to park your money. Many realize this, which contributes to the excessive stock and real estate returns, as people look for places to get a real return on their money. I do believe bond prices could perform very well in the short term for a flight to safety during a recession, and once Powell does lower interest rates meaningfully. As a long-term investor, it is not a place I will be keeping my money. Until next week,
-Grayson
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For now savings accounts at 4.5 percent are keeping pace with inflation (while not having the burden of selling like a bond would)while stocks are volatile. But if they really start down the road of financial repression gold/siilver may shine.