📈Economy & Markets

Powell and Trump don’t represent the first White House-Fed clash

by
Dan Weil
Quantfury Team
fed

The fight is on. Donald Trump is beginning to pressure the Federal Reserve to cut interest rates, just as he did in his first term.

And just as in his first term, it looks like Fed Chairman Jerome Powell won’t listen. Trump believes he should have a say on interest-rate policy in a break with history.

As part of the spat, Trump says he knows more about interest rates than Powell and has regularly said he can fire him if he wants. Powell says that would be illegal. 

Ironically, it was Trump who appointed Powell in the first place. That was in 2017, when Trump soured on Janet Yellen, who was appointed by Barack Obama. 

Trump and Powell weren’t the first president and Fed chair to butt heads over the last 50 years. Presidents almost always want lower interest rates, because that boosts the economy, improving the finances of voters. And that can naturally put the president at odds with the Fed, which is charged with controlling inflation.

The Nixon influence

In 1971, with the 1972 election in mind, Richard Nixon pushed then Fed Chairman Arthur Burns to lower rates. And he did. The results weren’t pretty. Inflation exploded for the next decade, topping double digits in 1972 and 1979.

In that last year, President Jimmy Carter had the courage to choose Paul Volcker as Fed Chairman to stamp out inflation. Volcker jacked up interest rates, helping to cost Carter the 1980 election as the economy sagged, but paving the way for low inflation over the next 40 years.

The Fed pursued a tight policy for most of the first 15 years under Volcker. President Ronald Reagan, who took office in 1981 wasn’t too pleased with Volcker’s tight-fistedness. 

His policy helped precipitate a severe recession, but most economists agreed that it was necessary to eradicate inflation.

Reagan’s spat with Volcker

The Reagan administration tried coaxing Volcker to cut rates ahead of the 1984 election. “The president is ordering you not to raise interest rates before the election,” James Baker, Reagan’s chief of staff, told Volcker. He didn’t obey. The Fed’s federal funds rate target peaked in August 1984.

Presidents after Reagan, up until Trump, didn’t fight the Fed and in fact had cooperative relationships with central bank chairs Alan Greenspan (under George H.W. Bush, Bill Clinton and George W. Bush), Ben Bernanke (under Bush and Barack Obama) and Janet Yellen (under Obama).

All this may leave you wondering what will happen now between Trump and Powell. It seems highly unlikely that Powell and his colleagues at the Fed will bend under Trump’s influence. If employment numbers weaken and inflation comes closer to the Fed’s 2% target, the central bank will likely add to the 100 basis points of easing it implemented last year.

But if jobs data stay strong and inflation rises, the Fed almost certainly won’t lower rates again and may even increase them. Radically higher tariffs could help lead to that result by boosting inflation.