What Trump vs. Powell Means for You
Anyone who has gone through a construction project knows the perils of project creep and cost overruns. For Federal Reserve Chair Jerome Powell, the experience might lead to a more difficult end to his tenure as Fed Chair, or potentially lead to his removal.
For months, President Trump has been threatening to fire Powell, primarily because the president thinks that short term interest rates, which currently stand at 4.25 – 4.50 percent, are too high. Every time the president flirts with unseating Powell, he pulls back, which is precisely what happened during the muggy days of July in Washington, D.C. But on Wednesday July 16th, a day after Trump had mentioned that he might give Powell the axe, he said firing Powell would be “highly unlikely, unless he has to leave for fraud.”
As a reminder, the Federal Reserve is an independent, self-funded agency and is not a part of the congressional appropriations process, though it is accountable to the public and to Congress. The bar is high to fire Fed officials: a 1935 Supreme Court ruling found that Fed officials can only be forced out or fired “for cause”, which most have interpreted as some sort of crime, like embezzlement or fraud. This spring, the Supreme Court seemed to carve out special privilege to the Fed, even as it granted permission for the Administration to fire other agency heads, noting that “the Federal Reserve is a uniquely structured, quasi-private entity.”
Enter the $2.5 billion, over-budget construction project at the Fed, which began in 2021. One Fed watcher told me that the building was a dump and needed a massive overhaul, but Trump officials and supporters have called it a “palace”. To be clear, the tax code provides the Fed with a lot of latitude when it comes to funding projects. But even if Trump chooses not to fire Powell, he could use the renovation project to goad him into leaving (unlikely, given Powell’s desire to remain in the seat for the full term), or to set him up as the fall guy for anything bad that happens in the economy
Why Should You Care About All of This Finger-Pointing?
At a time when the economy is still the focus for most Americans, the independence of the Fed actually matters. When the President toyed with firing Powell in April, there was a big, negative market reaction, stocks went down, the value of the U.S. dollar dropped, and long-term interest rates went up. That reaction was due to the fact that investors rely on the Fed to make policy decisions independent of politics or a president’s wishes.
For nearly 100 years, politicians have attempted to influence the Fed to lower interest rates, which can boost economic growth and lead to job creation. The problem is that low short-term interest rates can also foster inflation, and if that were to occur, investors would demand higher rates to compensate them for the extra inflation risk. For the U.S. economy to function efficiently, the Fed needs the freedom to raise interest rates to combat inflation, regardless of the fact that it might slow down the economy and disappoint consumers and politicians.
Does the President Have a Point, Should the Fed Lower Rates?
While incomes have risen over the past five years and the stock market has boomed, many Americans have a legitimate gripe about the rising cost of living in this country. Although headline consumer inflation (CPI) has come down from the 9 percent annual rate of June 2022, it is still running at 2.5 to 3 percent. But the real issue isn't just the rate of inflation, it's the cumulative effect of prices being high. Big line items like healthcare, housing and automobiles are all a lot more expensive today than they were prior to COVID, which creates a strain on household budgets. Consumers have been dealing with this for over three years now, and some are seeking relief in lower interest rates to finance outstanding credit card debt or to buy a car with a more affordable loan.
While there is a case for lowering interest rates, Fed Chair Powell said in June that officials can “make smarter and better decisions” if they wait to see how tariffs impact the inflation rate. Powell reiterated that the current level of interest rates has not substantially slowed down the economy or negatively impacted the labor market. The President thinks that the Fed should cut short term interest rates by about 3 percentage points.
How Are Consumers Reacting to Still-High Prices and Interest Rates?
American consumers are doing what they always do, they're adapting and being strategic about their spending. June retail sales rose 0.6 percent, well ahead of expectations, as consumers chose to open their wallets across many categories. It appears that consumers are in cautious, not crisis mode, spending when they see value, but being more selective about where those dollars go. They're more price-sensitive, more likely to comparison shop, and more willing to trade down or delay purchases.
What’s Ahead for Consumers in the Second Half of the Year?
So much depends on the overall economy and the labor market. If we see either start to deteriorate, then consumers are going to retreat. One white knight could come in the form of younger Americans. According to a McKinsey report, the average 25-year-old has a household income of $40,000, 50 percent higher than the average baby boomer at the same age (accounting for government transfers, inflation, and taxes). Gen Z spending is growing twice as fast as previous generations' spending at the same age. Despite contending with student loan repayment, higher costs and a tight labor market, younger consumers are stepping up their spending, boosting growth in subscription services, digital and live experiences, and sustainable products.