Trump should be thanking Jerome Powell for his second term

Sarah Silbiger/Bloomberg

After dropping many hints suggesting that he might prefer to have someone other than Jerome Powell running the Federal Reserve, Donald Trump said this weekend that he will not try to remove the Fed chair from his post. Perhaps the president-elect realized that he should be thanking Powell for his reelection rather than trying to push him out the door.

Yes, "transitory" Jay's failure to head off the highest inflation in over 40 years gave Trump his huge victory.

My monetary economics students at Wharton quickly learned that "People vote their pocketbooks," regardless of the political issue du jour, such as immigration, crime or abortion.

Voters loudly talk the political talk and fib to pain-in-the-phone pollsters. However, they walk the economic walk when voting, only thinking about which candidate best helps their family, job and business.

Political hacks say it best: "It's the economy stupid!"

Which brings us to the real question regarding this election: How could the Fed chair, arguably the beltway's second most powerful person, miserably fail at the Fed's most important job of maintaining price stability, thus resulting in runaway inflation deciding the presidential election?

The best answer is that he was not the right person for the job. Actually, one of the worst choices ever.

Former President Obama put Powell on the Fed's Board of Governors, but Trump elevated him to Fed chair and President Biden reappointed him.

These three presidents got a politically savvy Beltway insider from one of the world's most politically connected firms, the Carlyle Group. Strategically located between the White House and Congress, their revolving door business model has been called "access capitalism" — lobbying on steroids.

Powell's undergraduate major in political science and follow-up law degree was a great fit for Carlyle but a terrible one for the Fed. In fact, he is the first Fed chair without a Ph.D. in economics or even an economics major in nearly 40 years. Didn't we just say the highest inflation in 40 years?

The 400 Ph.D.'s at the Fed likely did everything possible to help Powell's on-the-job economics training. Surely, some of those economists saw this inflation coming in 2021, with record money supply growth resulting from pandemic-related fiscal and monetary expansion devilishly coupled with supply shortages.

Even if Powell could understand "econspeak," I believe he was unwilling to increase interest rates to help fight inflation in 2021 because his Fed chair reappointment by the newly elected President Biden was in question. Instead of rates being data-dependent, they became job-dependent.

Had Powell increased rates throughout 2021, the proper prescription for imminent inflation, it would have cooled the economy, the stock market and overall market spirits. But, it likely would have cost the politically programmed Powell his position.

Even after he was reappointed to the Fed chair in November 2021, Powell remained a team player and did not raise rates until March 2022. Unfortunately, the inflation genie, which still haunts us today, was well out of the Fed's bottle by then.

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This too little, too late response not only suggested his likely gratitude for the reappointment but also his failure to understand the schoolbook definition of inflation: "too much money chasing too few goods," both being magnified many times by the pandemic.

The economically untrained Powell even went so far as to tell Congress that inflation and the money supply are unconnected. Saying that money doesn't matter is like denying an economic theory of gravity.

Powell believes in Fed independence, as long as he is sitting at the head of their table.

Meanwhile, Trump is being criticized for threatening to kill Fed independence. But, you can't kill something that's already dead.

Fed independence died the day the Fed was born in 1913 and was initially controlled by the Treasury Department and the Woodrow Wilson administration. The Banking Act of 1935's attempt to inject independence likewise failed since it gave the president, the alpha politician in Washington, the right to choose the Fed chair from the sitting Board of Governors, with Senate confirmation. There is little oxygen for Fed independence between the White House and Congress.

Further proof that Fed independence is a myth is the fact that it was located in the heart of Washington's political swamp. I have long argued that we should follow the lead of the Germans by relocating the Fed to our financial capital — New York City — making the day-to-day politicizing of Fed business more difficult.

The proposed Department of Government Efficiency, or DOGE, would welcome a slimmed-down Fed sharing offices with the Federal Reserve Bank of New York. In fact, DOGE should question why we need 400 Fed Ph.D.'s with such a miserable inflation track record, not to mention their "mission creep" of engaging in research on "social policy topics" like climate change and racial justice. These are important issues, but they reflect political and normative views of unelected officials in what is supposed to be an independent government agency. 

DOGE should also trim down the morbidly obese Federal Reserve System, with its $6.1 billion budget for 12 regional Federal Reserve banks. In 1913, we needed 12, including two in Missouri, so that there was one in each of our major rail centers. But we only need six today: Atlanta, Chicago, Dallas, Kansas City, New York and San Francisco. Furthermore, all conferences should be held in existing Fed buildings instead of expensive resorts like Jackson Hole.

Memo to Trump: You need not bully the Fed into lowering interest rates, since the politically percipient Powell already got the message. He will likely be a team player to keep his job, as he did when the previous new administration came into power in 2021.

The rub, however, is the timing of rate cuts. Trump will want them front-loaded in 2025. Powell will be more measured: His goal is to keep his job until inflation settles at his 2% target to help restore his tarnished legacy, especially if done without a recession.

The outlook for inflation and Powell's legacy are both uncertain, but Trump's insistence on lower rates is not.