Central Bank Bosses as Lackeys?

It is curious to see how the U.S. president, in his Fed-bashing, mimics evermore the stance and attitude of Turkey’s authoritarian president Erdogan.

In one of his more recent tweets, President Trump actually asked this: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

It should be recalled that, while the U.S. President obviously had no role in appointing the Chinese President, he himself nominated Jerome (Jay) Powell as his choice for Chairman of the Federal Reserve Bank in November 2017.

Central bank heads as political puppets?

In Erdogan’s and Trump’s view, their country’s respective central bank is supposed to act like a political piggy bank, solely devoted to supporting the two presidents’ electoral fortunes.

Like any political subordinate, they have to be prepared, in their presumed masters’ view, to turn on the printing press at any given moment that they so desire.

And even though that is certainly not a favorable comparison for the United States by any means, one can very legitimately argue that Mr. Erdogan has a bit more of a basis for his discontent with the monetary policy of what he considers “his” central bank than Donald Trump has. After all, the Turkish economy is expected to contract in 2019.

The boom is off soon

The U.S. economy, in contrast, has been booming, although much of it was the result of the extended recovery from the Great Recession, rather than owed to Trump’s massive pro-cyclical tax cut, mostly benefiting the very rich.

In his own defense, Mr. Trump could argue – although he would never do so publicly (since he, to himself, is a genius running the U.S. economy) – that about one-third of polled economists expect a recession in the United States in 2020. That would be terrible timing for President Trump, considering that he seeks re-election next year.

President Trump’s anxiety and, therefore, anger at the Chairman of the Federal Reserve is also grounded in the fact that he himself has no ammunition to fight a looming downturn.

His irresponsible tax cut for the rich and for large corporations has created a ballooning fiscal deficit that will reach about $1 trillion in 2019 as well as in 2020 and beyond.

Did Trump peak too early?

The sugar high of that tax cut is long gone and is now followed by a sugar crash. The unhealthy habit of such binging on tax cuts is showing its effects on the body of the U.S. economy.

What’s more, Democrats now have the majority in the U.S. House of Representatives and there is no way in hell that they will agree to more Trumpian tax-cut candy.

Quite unsurprisingly, President Trump – never one to respect the separation of powers – has tweeted that he might simply cut taxes by decree. Alas, the law prohibits him from doing that.

That moves Jay Powell, the Fed Chairman, into the center of Trump’s political equation. Powell has held significant public office in the U.S. Treasury during the Bush Sr. administration. He is just about the last “classical” Republican left around Trump.

The trouble for Trump is that, unlike with his (now former) Secretary of State, Defense or Director of the CIA or intelligence agencies, he can’t simply fire Powell. That is a matter of central bank independence.

Of course, Trump could try to pull an Erdogan. The Turkish president basically cajoled his country’s dutybound central bank head into resigning to get his way with a new man at the Fed.

To be sure, Trump is determined to have the head of the Federal Reserve safeguard the President’s reelection chances by drastically cutting interest rates and even pursuing quantitative easing again, as Trump has suggested.

Powell’s “support” is even more important if, as is expected, Trump’s trade war fight with China deepens the global and U.S. economic slowdown next year.

The Fed: Last bastion of decent Republicanism?

Powell seems reluctant to be swayed by Trump. As a side note, U.S. monetary policy is not single-handedly decided by the Chairman of the Fed, but by the majority vote of the 12 members of the Federal Open Market Committee. The Fed Chairman therefore mainly has the power of suasion.

Powell is certainly mindful of one of his Fed predecessors, Arthur F. Burns. The venerable economist, who served in the post during the Nixon administration, had himself been pressured by Nixon to provide ill-advised loose monetary policy in the run-up to Nixon’s 1972 reelection campaign.

Nixon’s infamous Oval Office tapes prove the extraordinary – and by then probably unprecedented – interference by a U.S. president with the Fed’s independence. While Nixon did win reelection, Burns’ reputation was forever tarnished.

Not bailing out Trump and his trade policy

For now, it seems as if Powell is holding his ground. At the annual meeting of leading central bankers and economists from around the world in Jackson Hole, Wyoming, he just stated this: While “monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade.”

Translating Powell’s words into plain language, he tried to say: “President Trump, you dug that hole yourself and I ain’t helping you.”

As it stands, the alternative choice between Xi and Powell that Trump provided in his tweet is actually a fake one. The actual question is not who the bigger enemy of the United States is.

In order for Trump to go hard after Chairman Xi, the key question is this: Is Jay Powell prepared to turn himself into a mere presidential sidekick? Is he really prepared to change his role from what is prescribed in the Fed’s mandate to support a highly risky geoeconomic strategy on the part of the 45th U.S. President?

This is as high stakes as it gets.