Jerome Powell, who stepped down this week as chair of the Federal Reserve, had his hits and misses. The Fed was late to react as prices started rising when the Covid pandemic abated, but they eventually acted forcefully and achieved the most rare of feats: a “soft landing”, curbing inflation without sparking a recession or damaging employment.
Strangely, given the chaotic era of pandemic and tariffs that coincided with Powell’s time as chair, monetary policy may not define his legacy. Powell’s most lasting accomplishment will most likely be his outspoken efforts to defend the independence of the Fed from an assault by the imperial presidency of Donald Trump.
That job, unfortunately, is not done.
The chair managed the president smoothly, ignoring his demands to slash interest rates at every turn. When Trump went for the jugular, threatening to indict Powell over the spurious charge of lying to Congress about the cost of refurbishing the Fed’s headquarters, he pushed back, refusing to step down and publicly condemning Trump’s real motivation: payback.
“The best thing Jay Powell did for the Fed’s independence is that he just did the job as you are supposed to do it,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago. “Nobody knew how the Fed would respond under direct attack. His approach let us put our heads down and do the job as it’s supposed to be done.”
Even if Kevin Warsh, Trump’s pick to replace Powell, proves to be the president’s sock puppet, eager to cut rates regardless of mounting fears of higher inflation, he is unlikely to convince most of the 11 other members of the federal open markets committee, only two of which are Trump appointees.
But the Fed is not safe.
Trump’s ultimate goal is to subjugate the Fed to his will. Though he has failed thus far, he has the right supreme court to do it, run by a conservative majority that buys into the “unitary executive theory”, which in the vernacular means let-Trump-do-whatever-he-wants.
Trump is unhappy about Powell’s decision to stay on the Fed’s board after stepping down as chair, which deprives the president of a seat to fill. Though he was forced to end his legal attack on Powell, Jeanine Pirro, the US attorney for the District of Columbia has said she might reinitiate the process.
As Janet Yellen, who preceded Powell as Fed chair put it: “The threat to the Fed’s independence remains a very significant challenge when a president can threaten members of the FOMC and find ways to remove them because he doesn’t like their views on monetary policy.”
Trump targets various independent agencies
Powell is not the only Fed official harassed by the president. Trump also took aim at board member Lisa Cook, accusing her of lying on a mortgage application and firing her “for cause”. That decision remains in limbo: lower courts ruled against Cook’s removal, arguing that the “cause” was flimsy and that Cook was deprived of due process. But Trump appealed to the supreme court, which has not yet ruled.
The Fed is hardly the only institution at risk. The supreme court has dismantled legal protections that for decades shielded independent agencies from presidential whims. It has allowed Trump to fire members of the National Labor Relations Board, the Merit Systems Protection Board, the Consumer Product Safety Commission and the Federal Trade Commission.
Chief Justice John Roberts and his friends on the court’s right would like people to believe this restores presidential power to its rightful, constitutional place. But they are making a mess. As Justice Ketanji Brown Jackson remarked: “Having a president come in and fire all the scientists, and the doctors, and the economists and the PhDs, and replacing them with loyalists and people who don’t know anything is actually not in the best interest of the citizens of the United States.”
The Fed is better protected than other agencies largely because of the cost of letting a president use the monetary authority to political ends. From Narendra Modi’s India to Recep Tayyip Erdoğan’s Turkey to Richard Nixon-era America, pressing central banks to change interest rates, meddling with their leadership or forcing them to fund government debt pretty soon raises inflation, at great economic cost.
The argument must resonate extra loudly during the most unrestrained, lawless presidency in memory. Trump will deploy policy to settle grudges, reward friends and pursue fantasies. He has raised tariffs, lowered them and raised them again, disappeared federal agencies, gone to war ignoring Congress, steered business to friends and deployed the government against enemies.
At a conference about central bank independence last December, Randall Kroszner, former member of the Fed board of governors, observed that financial markets have kept their cool despite Trump’s threats to the Fed. Long-term interest rates and the dollar’s exchange rate have not behaved as if they had lost hope in the Fed to combat inflation.
He concluded that markets believed Trump’s threats were not out of the ordinary. This assessment, he said “implicitly relies on an assumption about a broader political consensus to sustain credibility of the central bank over time”. That is, markets trust the legal system – in particular the supreme court – to defend the Fed’s independence when push comes to shove.
Even the conservative justices on the supreme court understand this. After pontificating about how the constitution demands that Trump be allowed to do what he will with most federal agencies, they gave the Fed a pass. The reason? It is “a uniquely structured quasi-private entity that follows in the distinct historical tradition of the first and second banks of the United States”.
“I don’t think I need to tell you how completely stupid that sentence is,” said Stephen Vladeck, a law professor at Georgetown University, seated among the central bankers at the December conference. “But its analytical unpersuasiveness notwithstanding, the fairly obvious point of that sentence was the justices in effect saying: ‘Don’t worry, markets, we’re not coming for the Fed.’”
This leaves the institutional grounding of the US government in limbo. Much of the federal apparatus looks doomed to be trampled by a whimsical president. The Fed’s independence survives, for now, hanging from an arbitrary thread. Powell should be applauded for staying on the board. He can’t stop the supreme court from making a mess. But he can help make the best of the Fed’s autonomy while it has it.
