STANDING FIRM — Federal Reserve Chair Jerome Powell, Donald Trump’s long-running punching bag, is fighting back.
First, Powell — who studiously avoided engaging with Trump in the past — issued unusually pointed criticism of the president, who has made a habit of attacking him since his first term in the White House. Today, Wall Street titans weighed in on Powell’s behalf, alongside the heads of 10 major central banks around the world who expressed solidarity with the Fed chair in a joint statement.
The pushback began Sunday when Powell went public with an acknowledgment that the Department of Justice opened a criminal investigation against him, and accused Trump of orchestrating the probe as part of an ongoing pressure campaign to lower interest rates.
“I have deep respect for the rule of law and for accountability in our democracy. No one — certainly not the chair of the Federal Reserve — is above the law. But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure,” the central bank leader said in a rare video message.
The revelation of a DOJ probe, which is related to renovations at the Fed headquarters, has stunned financial markets and many of Trump’s allies. On Wall Street, fears are heightened that Trump is encroaching on the Fed’s vaunted independence — which could spell disaster for the markets.
To better understand the tensions and the dynamics at play, Nightly spoke with Victoria Guida, POLITICO’s economic correspondent.
White House allies and Republican lawmakers have frowned on this criminal probe into Powell. What are their biggest concerns here?
Within the administration, some officials were worried that this could blow back on the White House, including by making the all-important bond market (that sets the interest rates paid by the U.S. government and influences all other debt costs) more nervous about what’s going to happen to the Fed.
Lawmakers who have expressed concerns, in both parties, are worried that this kind of investigation might make it difficult for central bank officials to keep making decisions that they believe are in the best interest of the economy, rather than taking direction from the president. Rate-setting is set up to be insulated from short-term political pressures because politicians have the incentive to push for lower rates in the short term to juice the economy, but at the price of higher inflation over time.
Does Powell have any cards to play here? Is there any reason to think this pressure campaign might actually backfire against the White House?
He played a significant card on Sunday that he’s never played before: responding directly. For years now, Powell has refused to engage with criticisms from Trump (who regularly refers to him as a moron), but the lawsuit prompted the Fed chair to directly accuse the president of using the threat of indictment as a means to pressure him to lower borrowing costs. Trump, for his part, has said he didn’t know about the investigation, though he said just a couple weeks ago that he might sue Powell over the renovations.
Markets cratered in 2018 on the prospect that Trump might try to fire Powell. How have they responded this time?
Markets showed some early signs of anxiety soon after the news of the probe came out – and gold surged, which is never a sign of confidence in government – but stock and bond investors ultimately didn’t freak out because they still aren’t sure whether Trump will actually move against Powell. One thing that seemed to bolster their impassivity: the strong reaction from multiple Republican lawmakers in defending Fed independence.
Also, people on Wall Street are closely watching a Supreme Court case that will help define the circumstances under which a Fed board member can be fired by the president, and they’re still waiting for the outcome there (oral arguments are set for Jan. 21).
Global central bankers have publicly rallied behind Powell. What is their motivation for speaking out on his behalf?
Trump is not the only politician who wants rates lower rather than higher; it’s a common wish that he is just much more public and persistent about pursuing. And the U.S. can help shift global standards. In other words, how this situation plays out could also affect how these central banks are treated in their own countries. But also, these foreign officials know him and want to offer their support.
The next development in this saga will likely be up to the Supreme Court, which will soon hear arguments about Trump’s separate bid to fire Fed board member Lisa Cook. How could the court’s response set the tone for the future of both Powell and the Fed?
As I mentioned earlier, this case will be a big event for Wall Street. There’s even the possibility that markets could move during oral arguments in reaction to the justices’ questions. But market pricing suggests that investors are expecting the high court to bolster Fed independence, with good reason: the justices have signaled that they view the Fed as having special legal status.
Still, Fed officials can be fired “for cause,” which is generally interpreted to mean some kind of wrongdoing. But the ruling here will be the first time that term has ever been defined, with important implications for all sitting Fed board members, especially Cook and Powell.