Lisa Cook, a member of the Federal Reserves Board of Governors, and Fed chair Jerome Powell participate in a roundtable at Spelman College in Atlanta, Dec., 2023. Cook sued President Trump on Thursday over his decision to fire her from the nation’s central bank, arguing that the White House had no authority.KENDRICK BRINSON/The New York Times News Service
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
When U.S. President Donald Trump took the unprecedented step this week to “fire” Lisa Cook, a governor on the Federal Reserve Board, investors shrugged.
While U.S. bond yields fell slightly in the days after the announcement, they mostly seemed to think this is much ado about nothing. Because it’s not clear that Mr. Trump has any authority to do this, the case will be tied up in the courts for months, and even if his move ultimately succeeds, there will still be a minority of his own people on the committee that sets interest rates in the U.S.
Therefore, markets reckon there will be no imminent disruptions to U.S. monetary policy – and that when any changes do come, they will favour moderately lower borrowing costs, boosting share prices without triggering much inflation.
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Hence the reason investors have waved off the alarm bells ringing in the business press. Their complacency may not last, though. It’s clear that Mr. Trump is determined to seize control of the U.S. central bank and make it subservient to his administration’s policy, thereby ending the institution’s nearly century-long independence from political control.
Given that Mr. Trump favours ultracheap money, short-term interest rates may well be falling soon – possibly by a lot more than investors expect. While good for stocks, that would be bad for inflation.
And while historically, institutional guardrails like Congress and the courts were thought to rein in presidential abuse, Mr. Trump is closing in on his prize with little opposition. The seven members of the Fed’s Board of Governors are each appointed by the President and confirmed by Senate for staggered 14-year terms – one appointment every two years. Two governors are previous Trump appointees, and a recent vacancy gives the President the opportunity to select a third. If he succeeds in pushing Ms. Cook out, the board will be dominated by his appointees.
That still wouldn’t enable the White House to dictate interest rates, however, because those are set by the wider 12-member Federal Open Market Committee. The FOMC comprises the seven governors, along with five presidents from regional Federal Reserve Banks. (The U.S. doesn’t have a single central bank but rather 12 regional ones, whose presidents rotate on the FOMC.) So for the foreseeable future, Trump appointees will hold only a minority of seats on the committee setting interest rates.
But investors are probably mistaken for assuming this will constrain Mr. Trump’s push for a low interest rate. The five members rotated through by the regional banks must be approved by the Board of Governors, and their current terms expire in February. That means early in the new year, a Trump-majority board could approve only appointees who align themselves with the values of the White House. As early as next spring, the U.S. could have a MAGA-fied Federal Reserve.
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Would they just be lackeys who did Mr. Trump’s bidding? Investors seem to be hoping not, crossing their fingers that the presidential appointments need to be approved by the Senate, and that no self-respecting economist would be willing to sacrifice their reputation by becoming a minion.
Perhaps – but there are reasons for concern. First off, the Senate has practically turned itself into a rubber stamp when it comes to vetting Trump appointees. Second, you just have to look at Mr. Trump’s cabinet to realize it’s not hard for him to find appointees who don’t attach a great premium to self-respect.
Finally, even if an independent-minded person does get through the selection process, Mr. Trump has made abundantly clear he’s willing to deploy both carrot and stick to get his way: carrots in the inducements he dangles to those who fall in line, enriching their personal businesses, and sticks in intimidating and even ruining those who dare cross him. It seems implausible that he will allow FOMC members to frustrate his attempt to flood the U.S. economy with cheap money.
Ms. Cook’s legal battle seems to be a fight to determine whether the Fed remains independent or becomes an instrument of the president, including future presidents. If Mr. Trump gets his way and interest rates plunge, it will juice asset values but also boost inflation.
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As happened the last time central banks cut interest rates while governments were raising spending, during the pandemic, inflation could rise by a lot. That would, in turn, drive up bond yields as lenders demand higher interest rates to compensate for the loss of money’s value over time.
Bond markets already appear to be anticipating this increasing long-term inflation, because the gap between short-term and long-term interest rates is now widening.
It’s not out of the question that a Trump takeover of the Fed could induce both a stock market rally for the ages and the mother of all crashes. Thus, the one safe bet during all this turbulence appears to be that gold will keep rising, continuing to outperform stocks, bonds, real estate and even crypto. That’s because investors know it’s the one thing Mr. Trump can’t control, so they’re rushing to its haven.