Barely a day after declaring victory in the US election, President-elect Donald Trump is facing his first revolt from the establishment.
The world’s most powerful central banker has thrown down the gauntlet at the soon-to-be world’s most power leader, in a struggle between dominance and independence that could define the future of Trump’s second tour of the White House.
Federal Reserve chairman Jerome Powell, just hours after delivering Trump’s yet to be formed administration a gift in the form of a 0.25 percentage point interest rate cut, declared he was sticking around to serve out his term and the president-elect could not remove him.
“Not permitted under law,” Mr Powell told reporters at a press conference after the interest rate decision.
When asked if he would step down if asked by the incoming president, he replied with a terse: “No.”
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With a contract due to run until May 2026, there appears to be plenty of opportunity for an eventual showdown between the pair.
The independence of ‘the Fed’ is more than simple political convention.
It operates with legal independence subject to the oversight of Congress and, until Trump, presidents for decades had shied away from any comments about its operations or decisions.
Where it all went wrong
Originally appointed by Trump in February 2018, the then president ignored the conventions, constantly sniping at Powell with a torrent of abuse on Twitter and in interviews, urging the central bank to cut interest rates.
At one stage in 2019 he tweeted: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
Last month, he resuscitated that fight, arguing the president should have oversight over interest rate decisions, before firing off a series of personal barbs and openly mocking the Fed boss.
“I think it’s the greatest job in government,” Trump said.
“You show up at the office once a month and you say, ‘Let’s flip a coin’, and everybody talks about you like you’re a god.”
Later, in an effort to defuse tensions, he dismissed suggestions that he would try to remove the Fed chief but qualified it by adding “especially if I thought he was doing the right thing”.
According to an unnamed senior Trump adviser who spoke to CNN immediately after Powell’s defiant stance Thursday night, the president-elect will allow Powell to retain his job.
While that assurance may allay immediate concerns about the independence of the world’s biggest central bank, it may have been coloured by the rate cut announced just hours before, no doubt pleasing the incoming new president.
The US Federal Reserve has just begun cutting interest rates beginning with a double cut — 0.5 percentage points at its previous meeting — and this week’s 0.25 percentage point cut. It is widely expected to continue that program in the new year.
Powell was widely criticised back in 2019 for caving in to pressure from the then president by pumping liquidity into the system at a time when the US economy was starting to run hot. When the pandemic hit, the Fed found itself short of ammunition.
A month ago, despite the pressure he had heaped upon Powell at the time, the president elect laid the blame on the Fed boss for cutting rates in 2019.
Powell, clearly still smarting from the backlash over his capitulation to Trump five years ago, appears determined to enshrine the independence of the world’s most powerful central bank and restore his reputation.
Or be terminated for trying.
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Will Trump try to muscle the greenback lower in his global trade war?
Trump’s tariff plans have garnered most attention since his re-election.
But his stance on monetary policy could be every bit as damaging to the global economy as interest rate and currency moves can be enormously powerful weapons when it comes to international trade.
Half a century ago, political strong men would boast about the strength of their national currency, claiming it as a measure of global respect.
These days, it’s the opposite. A weaker currency delivers instant extra competitiveness on the global stage.
By artificially lowering interest rates, central banks can weaken the currency and gain an advantage over rivals.
A weaker currency makes your exports more competitive and reduces the ability of domestic consumers to buy foreign goods.
In the past, Trump has accused China of exactly that.
Asian leaders now look on with trepidation about what a Trump presidency may mean for currencies and whether the incoming administration will add a currency war to its clear intentions to begin a trade war.
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As the global reserve currency, the US dollar dictates the price of all other currencies and commodities and US government debt, considered to be the world’s safest and the benchmark for global interest rates, is the biggest foreign investment for many nations.
Japan holds around $US1 trillion ($1.5 trillion) in US government bonds and China, despite selling down in recent years, retains around $US770 billion worth of US government debt.
Stomping interest rates will reduce the value of those bonds and will have a serious impact on international balance sheets and the national wealth of the countries that own them.
Despite the tepid assurances this week that he won’t try to replace Powell, the incoming president has made no secret of the fact that he should have the ultimate say over interest rates.
“The Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot,” Trump said in August.
“I feel the president should have at least say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
Jerome Powell clearly thinks otherwise.