'Where's Kevin?'
Trump, Powell and a Warsh Fed
Federal Reserve Chair Jay Powell came under attack from President Trump this week. Trump said: ‘he’s always too late, a little slow. And I’m not happy with him...If I want him out, he’ll be out real fast, believe me.’
Trump subsequently walked back his comments, but as usual, the damage was already done. US assets sold off across the board in a pattern qualitatively, if not quantitatively, reminiscent of emerging market crises. US equities have had their worst April since 1932 and are underperforming relative to emerging market equities. Investors are seeking safety in EUR, CHF and JPY denominated assets. For all the talk of a Mar-a-Lago accord to address US dollar strength, the Trump administration is doing a perfectly good job of weakening it all by itself. Ironically, Trump's attacks on Powell will make it even harder for the Fed to ease policy without being seen to have caved to political pressure.
As many commentators were quick to observe, Trump appears to be setting up Powell as the scapegoat for the downturn caused by his administration's tariffs and what Treasury Secretary Bessent concedes is an effective trade embargo on China. Powell was a Trump 1.0 appointee, replacing Janet Yellen. The first Trump administration rightly feared that Yellen would tighten monetary policy in response to its tax cuts. For all her reputation as a dove, the Yellen Fed kept monetary policy unintentionally tight.
By contrast, Powell learned from the mistakes of the Bernanke and Yellen Feds. When the pandemic hit in 2020, he quickly unleashed a monetary easing that dwarfed that seen during the 2008 crisis. The worst that could be said about that response was that it succeeded too well. The US quickly returned to full employment, with inflation overshooting its target. The US economy outperformed its peers in the latter stages of the Biden administration.
Powell's term on the Federal Reserve Board runs until 31 January 2028. His term as Board chair runs until 23 May 2026. This raises the question as to whether Trump can fire Powell before then.