Last week, Ryan Craft wrote at terrific article, titled ‘The Most Powerful Man in the World,’ which you can read here about the power of Jerome Powell, the current Chair of the Federal Reserve. It even included a superimposed image of Powell’s face on Superman’s body.
I agree with everything that Ryan said, but I couldn’t help but wonder what the leader of the free world might say if he saw that article.
As it happens, even before Ryan’s article, President Trump has openly called for the Fed to reverse course and cut rates by a half of a percent and stop shrinking the balance sheet (which is a form of monetary tightening).
Although previous Presidents haven’t been so vocal in public, there is no rule that says that the President can’t speak out if they don’t like the current policy.
The Fed is independent, which is routinely acknowledged by the National Economic Council Chair, Larry Kudlow, who recently said on CNBC (his former employer) that ‘we all know the Fed is independent. The President is not dictating policy to the Fed.’
In recent weeks, the President has recommended two people to the Federal Reserve Board of Governors that has caused some people to wonder if they will be independent. The first, Stephen Moore, is a relatively well-known commentator, author and co-founder of the The Club for Growth.
The second, Herman Cain, is a successful business executive that worked for Burger King and Godfather’s Pizza before getting involved in politics, which culminated in his run for President in 2012 (fun fact – his economic advisor was Stephen Moore). He’s not new the Fed either – he was the Chair of the Kansas City Federal Reserve in the late 1990s.
Both men are highly accomplished and could do the job, but the question that a some have asked is whether or not they will be independent given their strong support for President Trump.
The Fed was intentionally created with a unique structure that made it ‘independent within the government.’ The idea was that the Fed sometimes has to make very difficult, unpopular decisions – like when Paul Volker raised rates into the teens to break inflation. It was the right thing to do, but deeply unpopular.
Although I would prefer largely non-partisan nominees from any government (truly non-partisan is never going to happen, they’re all partisan to some extent), I think that a lot of the commentary is overdone because Moore and Cain will only be two votes among 12 on the Federal Open Market Committee (FOMC).
The FOMC is made up of the seven Governors, who serve 14-year terms, and five of the Federal Reserve Bank presidents, who rotate between voting and non-voting members during their five-year terms.
Moore and Cain could shift the balance of power to some degree, but not to a great extent in my view. Personally, I don’t have a strong opinion about either candidate, my main point is that they governance system is designed to reduce partisanship.
My suspicion is that there is a fair amount of partisan rancor behind the scenes, and there always has been. The Fed has embraced transparency in recent years, so were simply seeing more of the sausage making that probably always took place.
Personally, I wouldn’t mind if the Fed was a little less transparent. When Volker raised rates, it took weeks for the market to even be sure what had happened. Now, the markets hang on every word in each statement and press conference.
A lot of the market volatility that we endured over the last six months were due to miscommunication between the market and the Fed. Maybe less transparency wouldn’t have a bit of difference, but I wonder if the market has too much power over the most powerful man in the world.