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President Donald Trump wants to fire Jerome Powell, chairman of the Federal Reserve. There's nothing Powell thinks about Trump's job performance yet, but Powell says he's not planning to quit by the end of his term next year. If Trump tries to fire him, he will see Trump in court.
That's a mess. It's like being a little kid in a big crazy family watching adults play an annoying and screaming fight in front of their neighbors. It's embarrassing. But it's more than that. This big crazy family needs more than ever a neighbor, including everyone from all over the world who are involved in our financial system.
Perhaps there's not much we can do about the fight. Adults clearly don't care much about our kids. If so, they stopped fighting and understood all this. But it may be helpful to understand what the fight is and how it can be easily solved.
President Donald Trump is watching Federal Reserve Chairperson Jerome Powell take the podium at a press conference at Rose Garden at the White House on November 2, 2017.
Behind all the details there is one major problem. For adults, money is bad. It's really bad. The last few presidents and Congress won something like $37 trillion in debt. As more and more are concluded, this is a badly dysfunctional family and something already in the minds of all of its neighbors – it will be more difficult and more expensive to fund all of its debt.
Trump accuss Jerome Powell of “Mr.”. Too late, “Calling the Fed Chairman as the “major loser”
As you can imagine, there is a political part to the fight. Trump believes Powell has only one job. But that's wrong. The Federal Reserve is created by Congress. Powell is supposed to do what Congress told him to do. And in 12 USC §225A, Congress ordered the federal government to promote “maximum employment, stable prices and moderate long-term interest rates.”
It seems clear enough until you rely on Section 10. There, Congress tells the president that he is obliged to appoint the Fed chair. Trump argues that this must mean he also has the power to fire the chair.
If this is a simple power struggle, it's not that important. However, Trump also promised in his inauguration speech in January that he “promised an overhaul of our trading system to protect American workers and families. Instead of taxing citizens to enrich other countries, we will impose tariffs and taxes on foreign countries to enrich our citizens.”
America is a powerful Federal Reserve leader and can return to financial sanity and Trump can return to the White House
So far, Trump has not been consistent with celebrating his promise. On April 2nd, he announced a massive “liberation day” tariff. On April 9th, he suspended the tariffs. He said China is a major issue requiring the US to impose massive new tariffs. He then stopped those duties on electronic goods.
If the president is talking and not doing it, you might think things can't go that badly. Perhaps his advisor is trying to make sure he doesn't do any real harm.
simply.
In fact, the uncertainty is almost bad. Companies cannot support themselves for one threat. They have to worry about all of them.
Trump lifts the heat to the Fed's chair, pushing rate cuts down: “Powell's end can't come fast enough!”
Powell is in an even more severe place. His mission – low inflation and low unemployment – is tough enough without a president who believes he can “overhaul our trading system.” It's almost impossible for a president who continues to change his mind about how to do it.
This whole thing is particularly annoying for economists. Looking at the bad things happening in bonds and currency markets, we see that damage has already been done. And we know there is a simple solution: put down the computer that will be responsible for the Fed.
Seriously. Fire Powell, tell Trump that he has early tee time, then program some simple rules to the computer. Set interest rates on the machine and let the money supply be controlled.
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For at least the last 40 years, smart economists have been discussing “rules vs discretion.” The question is whether the Fed's work (such as affecting interest rates etc.) should be done by situations that ensure that computer-programmed rules are followed or smart people who adapt to well-trained store clerks. (If you want an example of how this works, check out what's called “Taylor Rules.”)
A store clerk who follows the rules works OK if the rules programmed into the computer are appropriate for the situation. But what if the current economic situation does not meet the rules? That's when a discretionary, wise person wants to adapt to the situation.
But if the people we choose are (a) smart but do not fully grasp the changing situation, then (b) smart but driven by short-term political concerns, or (c) not very smart.
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This discussion of rules and discretion is fun for nerds in the economic sector. But the confusion created by this loud and unpleasant struggle of forces has taken us past it. Even if the computer isn't as good as the person, it's predictable.
And given all the madness that's happening right now, we need to be predictable.
For more information about Michael L. Davis, click here
