Each year at this time, the Federal Reserve Bank of Kansas City hosts the largest gathering of US and global central bankers in Jackson Hole, Wyoming. Attendees include all high-ranking US Fed officials as well as their counterparts from around the developed world. There are wide-ranging discussions about economic and financial trends, interest rates, inflation, risks to the outlook, etc., etc.
This year’s confab starts tomorrow morning. It always kicks off with a keynote speech from the US Fed Chairman, in this case Jerome Powell, who speaks first-thing tomorrow morning at 10:00AM Eastern Time. The US financial markets typically hang on the Fed Chairman’s every word.
These annual gatherings always get a lot of news coverage, and this year’s symposium will be under more media scrutiny than ever. Why? It is widely expected that Fed Chair Jay Powell will convey a message that the Fed plans to continue lowering interest rates going forward, and that the recent rate cut of 0.25% at the end of July was not a one-time event.
There is a wide consensus that this is what Chairman Powell will confirm tomorrow. The Fed Funds rate futures are pricing in a 100% probability that the Fed will cut rates again at its next policy meeting on September 17-18, and a 70%-80% chance it will cut again at the policy meeting on December 10-11.
My main point today is that the US stock and bond markets are going to be very disappointed if Chairman Powell does not confirm that the Fed is committed to lowering the Fed Funds rate several more times in the months ahead in his Jackson Hole speech tomorrow morning.
As regular readers know, I have not agreed with the Fed’s recent decision to cut short-term interest rates. Why? Despite the media’s obsession with an impending recession, the US economy continues to be quite strong, as evidenced by the latest retail sales report for July which showed consumer spending expanding at more than twice the expected level.
Despite that, there has been an increasing drumbeat for the Fed to continue lowering interest rates for the foreseeable future. President Trump has repeatedly criticized Chairman Powell – who he appointed – for raising rates too much last year, and has been the cheerleader for more interest rate cuts going forward.
So it remains to be seen what tone Chairman Powell sets for the interest rate discussion at this weekend’s Jackson Hole Fed symposium. I will only say that I believe there could be serious disappointment if Powell doesn’t make clear the Fed is committed to lowering short-term rates even further just ahead – even if I disagree with the policy.
Specifically, if Chairman Powell merely reiterates his recent comment that the Fed will “act as appropriate to sustain the economic recovery,” I think that will be a disappointment to the markets tomorrow. The financial markets, in my opinion, want to hear something more definitive – that the Fed intends to continue lowering interest rates.
We’ll see tomorrow morning. Now let’s move on to an even more interesting question.
Can President Trump Fire Fed Chairman Jerome Powell? Yes
President Trump has been increasingly critical of Jay Powell this year. He has openly and publicly criticized Chairman Powell repeatedly for raising interest rates too high last year. This is despite the fact that Trump appointed Powell to the position in February of last year.
In light of Trump’s repeated criticism of Powell, the question has arisen: Does the president have the legal authority to fire the Fed chairman? It’s an interesting question. Here’s the answer, sort of:
Under the Federal Reserve Act, which was signed into law in 1913, the president has the power to appoint seven members to the Fed’s Board of Governors, with the approval of the Senate. It doesn’t explicitly give the president the power to remove Fed members, but indicates it could be possible. It says:
“The President shall fix the term of the successor to such member at not to exceed fourteen years, as designated by the President at the time of nomination… Thereafter each member shall hold office for a term of [up to] fourteen years from the expiration of the term of his predecessor, unless sooner removed for cause by the President.”
The key words are: “removed for cause.”
Some legal scholars believe Trump cannot remove Powell as chairman simply because he doesn’t agree with his monetary policy. It’s also important to note that Powell alone hasn’t been setting the country’s monetary policy. The 10 voting members of the Federal Open Markets Committee all agreed unanimously to raise interest rates four times last year.
Powell also waded into the debate in March during an interview on “60 Minutes.” Although he avoided commenting directly on Trump’s criticisms of the Fed, Powell said that he did not believe the president could fire him.
“The law is clear that I have a four-year term, and I fully intend to serve it,” Powell said in that interview, citing the Fed’s independence from the White House. When asked directly whether Trump could fire him, he said, “No.”
Yet despite what Mr. Powell said, if the president of the United States believes you are acting against the good of the country, and he asks you to resign, you resign. Period. The president has the legal authority to appoint your replacement. End of story.
Will President Trump do it? I doubt it.
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