Jerome Powell, President Donald Trump’s nominee to chair the Federal Reserve, faces multiple risks as he prepares to take stewardship of the economy. Among the biggest: the threat of being publicly criticized by the president himself.
The Fed zealously guards its ability to make monetary policy decisions free from short-term political pressures, a key feature of its structure. But the president has already proven willing to buck tradition by targeting the central bank, and its chair, in the bluntest terms on the campaign trail.
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“She’s very political, and to a certain extent, I think she should be ashamed of herself,” Trump said of Fed Chair Janet Yellen in a CNBC interview in September 2016. During a presidential debate that same month, he accused Yellen of artificially propping up the economy with low rates.
Now, with the economy showing new strength and stocks hitting record highs, if a Powell-led Fed responds by accelerating interest rate hikes, the president could be provoked to speak up again. And Powell will have to rely on his relationships on Capitol Hill, as well as with Treasury Secretary Steven Mnuchin, to help ward off any such attacks.
Since Trump’s election a year ago, the Fed has grappled with the possibility that the president could publicly criticize the central bank, plunging it into an uncomfortable political spotlight.
“The Fed needs a good reputation, and its credibility matters,” said Sarah Binder, a political science professor at George Washington University.
“If you have criticism coming in from Trump and coming in from Congress, … there will always be questions about whether the Fed will succumb in any type of way or be diverted from its policy prescriptions,” she added. “That makes it harder for monetary policy to work.”
Certainly, the central bank’s best defense against attacks is to keep the economy on an even keel. But if conditions turn sour over the next few years — a real possibility given that the current expansion is already the third-longest in U.S. history — the Fed would be an easy target. And the president hasn’t shied away from criticizing even his own appointees, as Attorney General Jeff Sessions and others have discovered.
If the president is unhappy with the Fed’s performance, he could also use additional appointments to shake up the central bank.
As a result, the Fed spends considerable energy figuring out how to stay out of politics and preserve its independence.
Its ability to do so will soon sit squarely on the shoulders of Powell, who will not only have to guide decisions that affect the economy but also defend them to Congress and the public. His confirmation hearing before the Senate Banking Committee is set for Tuesday.
While Trump criticized the Fed more stridently than any major presidential contender in modern history, congressional Republicans have taken aim at the central bank for years. One GOP lawmaker says the key is for the chair to convey his intentions effectively.
“The better the Fed communicates its policy trajectory, both to the public and to Congress, the more it is going to be able to achieve that independence that many Fed officials want,” Rep. Andy Barr (R-Ky.), who chairs the House Financial Services subcommittee on monetary policy, said in an interview.
Powell is both a Republican and an Obama appointee, providing him with bipartisan support that might help fend off threats to the central bank. A member of the Fed board since 2012, he’s more sympathetic to Republican calls for a simpler rulebook for banks yet also more in line with Yellen on interest rate policy.
He also comes into the job with a fair amount of relationships on the Hill already; between January and September, he met with 13 different senators and multiple House members. And since his nomination as chair, he has had a flurry of additional conversations.
“I think very highly of Jay,” Barr said. “He and I have gotten a chance to know each other through an informal breakfast meeting and other meetings in my office.”
Still, while criticism from the president could undermine public support for the institution, the bigger worry for the Fed is the potential for those criticisms to carry over to congressional action.
The central bank is perpetually involved in a delicate dance with Congress. It has the freedom to set interest rate policy as it sees fit to achieve the dual goals that Congress has given it: price stability and maximum employment.
But the Fed was created by Congress, meaning some of its powers could theoretically be taken away by the legislators. So the chairman must remain on good terms with congressional leaders while not paying heed to whatever short-term policy action the lawmakers would like to see.
House Republicans in particular have sought to have a greater window — and, the Fed worries, more influence — on monetary policy decision-making. The Financial Services Committee this month approved three bills along those lines, including one requiring the central bank to explain whenever it deviates from a strategy.
Barr says this type of clarity will actually protect the central bank from attack because it will help Congress understand where the Fed is going.
“In the last year, there has been a very noticeable effort to respond to some of the concerns that members of Congress have had in asking for greater clarity and communications” as the Fed begins to pull back some of its extraordinary support for the economy, he said.
But the more power the Fed aims to use, particularly on the regulatory side, the more it should expect Congress to weigh in, he said.
Yet concrete Fed reform would be hard to achieve. That’s because while most lawmakers would like to make changes to the central bank, there’s no consensus as to what those changes should be.
Powell could help keep it that way in a Republican-majority Congress.
“I do think that you’re going to see — and you already have seen this — fewer calls for more congressional oversight over the Fed, and fewer complaints about Fed governance, and fewer complaints about the Fed, broadly speaking, at least as long as the economy is okay, than you did when Yellen was there,” said Ian Katz, an analyst with Capital Alpha Partners.
The Fed’s relationship with Congress and the administration could also change simply because Powell has a different personality than Yellen. His low-key style is perhaps more suited to the type of political schmoozing that she politely engaged in only when necessary.
He also got to know members of Congress in 2011, when he was a fellow at the Bipartisan Policy Center and met with numerous Republicans to convince them of the dire consequences of not raising the debt ceiling.
Powell is expected to remain a firm advocate for Fed independence, though Mnuchin backed him as a safe pick over whom he hoped he could exert some influence.
“I think Mnuchin or anyone in the administration that thinks they’re going to have influence over Powell is going to be disappointed,” Katz said.
And if the president does decide to go on a public campaign against a Powell Fed?
“That would obviously be awkward and uncomfortable,” Katz said. “The Fed wouldn’t be happy with it, but I think they would just keep on doing what they’re planning on doing.”