Apparently Bessent has been begging him to stop but he just can’t help himself. This is from last week:
Treasury Secretary Scott Bessent has repeatedly cautioned White House officials that any attempt to fire Federal Reserve Chair Jerome Powell would risk destabilizing financial markets, according to two people close to the White House granted anonymity to share details of private discussions.
Bessent’s private message reinforces what President Donald Trump already knows but comes as the president’s anger with the Fed chair is growing because Powell hasn’t shown signs that he will cut interest rates soon. It also comes against the backdrop of widespread market turmoil over the administration’s far-reaching trade war.
Trump’s fury with Powell burst into public view on Thursday morning, when he said in a post on Truth Social that his “termination cannot come fast enough!”
Any attempt to remove Powell — a legally questionable option Trump considered in his first term — would feed instability in markets already woozy from the recent tariff whiplash. Investor confidence that the central bank will make decisions based on the path of the economy rather than on short-term politics is a key underpinning of the U.S.’s global financial reputation.
“I don’t think he’ll do it but frankly this is a grenade with the pin pulled,” said one person familiar with the situation, who was granted anonymity to speak candidly, referring to the president’s longstanding frustrations with Powell, “so there are no guarantees.”
Great.
According to all the financial pundits, this drop today is entirely because of Trump’s comments.
I posted this earlier but it’s worth doing again because it’s so important. Krugman on the threat:
… we really, really don’t want someone that crazy dictating monetary policy.
The reason we don’t want politicians in direct control of monetary policy is that it’s so easy to use. After all, what does it mean to “ease” monetary policy? It’s an incredibly frictionless process. Normally the Federal Open Market Committee tells the New York Fed to buy U.S. government debt from private banks, which it does with money conjured out of thin air. There’s no need to pass legislation, place bids with contractors, deal with any of the hassles usually associated with changes in government policy. Basically the Fed can create an economic boom with a phone call.
It’s obvious that this kind of power could be abused by an irresponsible leader who wants to preside over an economic boom and doesn’t want to hear about the risks. This isn’t a hypothetical scenario. Consider what happened in Turkey, whose Trump-like president, Recep Tayyip Erdoğan, recently arrested the leader of the opposition. When the global post-Covid inflation shock hit, Erdogan embraced crank economic theories. He forced Turkey’s central bank, its equivalent of the Fed, to cut interest rates in the belief, contrary to standard economics, that doing so would reduce, not increase inflation. You can see the results in the chart at the top of this post.
How can we guard against that kind of policy irresponsibility? After the stagflation of the 1970s many countries delegated monetary policy to technocrats at independent central banks. Can the technocrats get it wrong? Of course they can and often have. But they’re less likely to engage in wishful thinking and motivated reasoning than typical politicians, let alone politicians like Trump.
What makes Trump’s attempt to bully the Fed especially ominous is the fact that the Fed will soon have to cope with the stagflationary crisis Trump has created. Trump’s massive tariff increase will lead to a major inflationary shock:
Moreover, Trump has also created huge uncertainty by radically changing his policies every few days, which will depress spending and may well cause a recession:
Not incidentally, Trump has been able to pursue these destructive policies because U.S. law gives the president enormous discretionary power over tariffs. And now he wants the same kind of discretionary power over the Fed.
As a consequence of Trump’s destructive tariff regime, the Fed will soon face a dilemma. Should it raise interest rates to fight inflation, or should it cut rates to fight recession? It’s a really hard call, and it’s quite possible that Jay Powell will get it wrong. Trump has made Powell’s dilemma even worse with his attempted bullying, because a rate cut would be seen by many as a sign that Powell is giving in to avoid being fired.
But one thing we know for sure is that we don’t want Trump making that call. Like Erdogan, he has embraced crank economic doctrines to justify his policies, in Trump’s case the ludicrous claim that tariffs won’t raise consumer prices. Does anyone doubt that when inflation rises, he’ll dismiss it as “fake news”?
No, no, no…
Trump has been cowed by the financial markets up until now. But he’s not entirely sane I don’t trust that he won’t do it if Navarro or some other nut advises him to go for it. As his dementia creeps in he’s more and more prone to impulsivity.
