Poor Trump. He savored the end of Jay Powell’s term as Federal Reserve chair and looked forward to more of a loyalist in his appointee as Powell’s successor, Kevin Warsh.
To get the job, Warsh made all manner of tacit commitments to President Trump on lowering interest rates. But it took about a minute for Warsh to appreciate that his future lay with adhering to the norms of the Fed and the realities of the economy, not the delusions of Trump.
On Wednesday, presiding over his first meeting of the Federal Open Market Committee, Warsh wisely chose to be with a 12-0 majority for leaving interest rates alone rather than being the lone dissenter in favor of cutting them in the face of rising inflation. And he put a few other personal stamps on his chairmanship.
Warsh put out a much more abbreviated statement on the Fed’s economic expectations than his predecessors typically did. Instead, he invited each of the Fed governors and regional bank presidents to offer their own views. About half opined that persistent inflation would require higher interest rates by year-end. None expected rate cuts.
Warsh also walked back previous comments to the effect that the Fed should drastically shrink its balance sheet of bond holdings. And he appointed five task forces to study various aspects of the Fed’s workings.
The Fed, created in 1913, was not part of the constitutional Founders’ original schema of checks and balances to restrain executive tyranny, but it fits right in. As Trump becomes more floridly insane, the Supreme Court justices would be wise to revisit their doctrine of a “unitary executive,” which has led them to undermine regulatory agencies that Congress legislated to be independent. Even Chief Justice John Roberts has come to appreciate that we need more checks on Trump, not fewer.
That said, the role of the Fed as an independent power center is a mixed blessing. In the current context of rising inflation, the Fed is right to resist pressures to cut interest rates. But the Fed nearly always errs on the side of overly tight money at the expense of economic growth and job creation.
The Warsh Fed is no exception. Its brief statement Wednesday pledged that “the Committee will deliver price stability,” with no mention of its other mandate, supporting full employment.
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The Fed also remains far too lax when it comes to financial regulation and far too gentle on banks when it comes to bailing out the disastrous consequences. The Fed may be a useful counterweight to Trump, but it is no counterweight to predatory capitalism.
Meanwhile, Trump has begun to appreciate the connection between his own missteps and the Fed tight-money policy that he doesn’t like. Speaking to reporters after the end of the G7, in Évian-les-Bains, France, Trump was shockingly candid about why he chose a cease-fire in the Iran war, on terms that both critics of the war and hawks in his own party will rightly term a defeat. “I didn’t want to see economic catastrophe. If you kept this going, that could have happened,” he said, adding that he did not want to be the president who caused a Great Depression.
“All I know is every time we talked about the possibility of peace, the stock market shot up like a rocket ship,” Trump added. “Every time we said something negative, like, guess what, we’re not going to be able to settle, it would go down very big.”
In pausing the war, Trump was more worried about being remembered as Herbert Hoover than as Neville Chamberlain. For once, Trump spoke truth. You have to wonder if maybe one of Trump’s 22 medical specialists slipped some sodium pentothal truth serum into the president’s drug cocktail.
