Trump Vs. Powell: Business Planning Implications

Business leaders may think that President Trump’s possible decision to fire Jerome Powell as chair of the Federal Reserve System is just a sideshow, but the resolution of control over the Fed has very large implications for business. Our future level of inflation and frequency of recessions—as well as the overall business climate—will be highly influenced by how the contest plays out.

President Trump appointed Powell to lead the Fed in 2018. The president recently criticized the Fed chair, writing on Truth Social, “Powell’s termination cannot come fast enough!” Trump asserts that he has the authority to fire the Fed chair, while Powell has stated that he would contest such an action in the courts.

Two economic issues arise from this power play. First, the constitutional structure of separation of powers, checks and balances, has served the country well economically and also politically. America’s founders envisioned that the three branches of government—executive, legislative and judicial—would each have limited powers, held in check by the other branches. That structure, along with other constitutional restraints, has enabled the United States to avoid many of the economic disasters that befell other countries. Presidential control of business and taxation has been limited, though not perfectly. Congressional overreach has sometimes been vetoed by the president, sometimes overruled by the Supreme Court. In short, the system served the economy and business community well.

Fed independence, though, is crucial to low inflation and stable economic growth.

On the constitutional issue, Congress clearly has authority granted by Article I, Section 8, “… to coin Money, regulate the Value thereof ….” Under this authority, Congress established the Federal Reserve System. That law states that the chair may only be dismissed “for cause.” Attorneys are probably running through arguments both sides would use about a dismissal.

More important than the legal issue for businesses is what dismissal of Chair Powell would mean for inflation and economic stability.

Countries in which the central bank is independent of the executive tend to have lower inflation and more stable economies. Politicians with short-term time horizons—like to the next election—often favor economic stimulus to improve employment, even at the cost of inflation that will be difficult to fight in later years. Independence allows the central bank to ignore political pressure for short-term results.

Economic stability is also enhanced when inflation is kept low. Rising inflation leads to anti-inflation policy that often triggers recession. Keeping inflation low prevents this problem. It’s the reason that the Fed is currently so focused on bringing inflation down to the target of two percent. Although monetary policy is often portrayed as a fight between “hawks” who want to fight inflation and “doves” who want to stimulate employment, there’s general belief among economists that employment is best supported in the long run by keeping inflation low.

Virtually all economists, from the left and from the right, favor central bank independence because it more often delivers low inflation and stable economic growth. (Some economists, especially from the left, favor independence but without a single-minded focus on inflation, and possibly with other policy goals such as equality.)

Although central bank independence is good on the grounds of low inflation and stable economic growth, the long-run performance of the economy may be better with strong separation of powers among the three branches of government. Independent agencies contravene this concept. Separation of powers and rule-of-law make it harder for a strong executive to get things done, but in the long run that may be more a blessing than a curse. Certainly the extraordinary performance of the U.S. economy since ratification of the constitution makes a strong argument for this structure of government.

Business leaders should watch this issue. If courts decides that the Fed chair can be removed from office when the president sees poor job performance, then expect higher inflation on average. Look for monetary stimulus before elections, followed by tightening to fight inflation, followed by recessions and then more monetary stimulus. Review the history of the 1970s.

But if courts review a Trump-Powell dispute and decide that the Fed chair cannot be removed because of policy decisions, plan on independent agencies continuing to make their own regulations, pretty much as they have for the last century.