There is an old saying that it is much better to make the news than to be the news. One might not believe it but even Hollywood actors and Hip Hop musicians know that although it would of course not help the gossip columnists and paparazzi make their living. If you are, however, the head of a central bank, it is your fate to be the news as much as to make it.
That might sound fatuous, but I’d suspect that more people can name the governor or president of their respective central banks than that of their ministers of transport who, let’s face it, as they commute to and from work have a significantly more direct influence on their everyday lives. The names of the central bank bosses are always in the news and, although they are on their monetary policy committees supposedly merely a prima inter pares, we all know that ultimately it is they who determine what policy looks like and where rates will be set.
In 2012, Jerome Powell was appointed by President Barack O’Bama to the Board of Governors of the Federal Reserve System (for the benefit of more recent readers, I began to dub him “O’Bama” when after having been newly elected to the White House in 2008, like most of his predecessors, he turned up on the front pages of the papers propping up the bar in a pub in Ireland clutching a pint of Guinness whilst seeking his Irish roots and credentials although my various editors have over the years either got or not got the joke). Powell, elevated in 2018 by Donald Trump to the chairmanship has since been a notably low key holder of the office. He for one has certainly tried to make rather than be the news but Donald Trump has decided that it is to be different.
Powell has sat in the chair through some pretty difficult times, especially through the pandemic years from 2020 to 2022. Although he was back then widely praised for the Fed’s generously accommodative monetary policy including a winding back up of quantitative easing, his ultra-loose policy is also blamed for the ensuing rise of inflation and above all he will be remembered for having missed the boat. Who can forget his description of the incipit post-pandemic rise in CPI as “transitory”, something that it most certainly proved not to be and the subsequent aggressive tightening which was aimed at getting the Fed back ahead of the curve came not only at a cost to the economy and the people but got into the head of the ex-President and highly leveraged property developer Donald Trump that he was a man out of time.
Since Trump’s re-election Jay Powell has had a target on his back although the law does not permit the President fire him, one of very few senior public servants to enjoy that privilege. Now there is the rising story of the huge cost of renovating the Fed’s building but above all the US$800 million by which the works are reputed to exceeded budget and all of a sudden the anti-Powell gang in the West Wing can see cause to have him prematurely removed from office.
By all accounts – I’m not on the ball here – he now stands accused of having misled Congress when he apparently denied that the cost of the renovation works had strayed too far from the original estimates, the cost of which will have had to have gone through Congressional appropriation processes. Trump can see a charge of the misconduct of having knowingly misled Congress coming on and with it the opportunity to dismiss him not only from the chairmanship of the Fed but also from the Board of Governors on which he could otherwise continue to sit until that mandate also expires and which he insists he wants to see out even after his tenure as chairman runs out in May 2026.
There is a battle of wills going on here and as much as I respect Mr Powell, he looks from where I am sitting to have possibly handed the President a smoking gun. The possible successors – remember that the Fed Chairman is a Presidential appointee – are already fawning their little heads off as though the job will go to the one who writes the most compelling poetry praising the virtues of the Commander in Chief. The old mid-20th century German concept of “Gleichschaltung” springs to mind; the literal translation is either “coordination” or “synchronisation” although in the context of Germany in the 1930s, it means the alignment of all parts of the country and its administration to the prevailing ideology.
My dear friend Professor Gwythian Prins refers to the Trumpian “quinfecta” which covers the White House, both houses of Congress, the electorate and of course finally the Supreme Court. If – not really if but when – Powell goes and a loyal yes man is installed at the Eccles Building in Washington, Trump will at least until January 2027 have a “sexfecta”. Powell did of course do himself no favours by cutting rates by 50bps ahead of the November election in what Trump can with some justification see as having been fairly overt support for his Democrat opponent Kamala Harris.
Forward markets are currently pricing in two rate cuts before the end of 2025, the first one being in September and after the summer recess, so not at the next FOMC meeting on 31 July, and the second one either at the October or the December convocation and most likely at the latter. If, on the other hand, Trump gets his man and brings the Fed in line with his thinking, then do not be surprised if rates find themselves in short order being cut by as much as 200 bps from the current 4.25-4.50%. Tuesday’s US CPI report was not quite in tune with headline inflation rising from 2.4% in May to 2.7% in June and core inflation rising to 2.9%.
On that basis, the Fed Funds target rate at 4.50% looks high but Powell is adamant that until the new tariff regime has found equilibrium – giggling, shrugging of shoulders and rolling of eyeballs permitted – he’d rather see the Fed err on the side of caution. Anyhow, the long expected tariff-induced inflationary spurt and slowing of the economy don’t appear to be happening although, as we all know, the economy is not as politicians would like to have it one great harmonious construct in which everybody does well when statistically it is growing nicely.
The experiment of cutting rates in the hope of generating growth and at the same time, by lowering industry’s cost of investing in productivity, bringing down inflation was tried by Recep Tayyip Erdoğan in Turkey – he even appointed his son in law to the governorship of the Central Bank of Turkey – and it proved to be disastrous. In the five years since July 2020, the Turkish lira has declined from TRY 6.85/US$ to TRY 40.25 at which it is trading at the time of writing. We might lack the “lived experience” of tariffs being systematically imposed on international trade but the same cannot be said for cutting rates in the hope of generating inflation-free growth.