President Donald Trump has ratcheted up his war of wills with the U.S. Federal Reserve, but at a time when markets are pushing monetary policymakers in Trump’s direction anyway. Trump departed from his policy thus far of naming mainstream candidates to the Fed’s board of governors, the locus of power in the U.S. central bank, by threatening controversial appointments to the two open positions on the seven-member board.
Previously, he got Columbia economist Richard Clarida in as vice chair, and Michelle Bowman to adequately fill the community banking spot. Two other nominations last year, Carnegie Mellon economist Marvin Goodfriend and longtime Fed staffer Nellie Liang, were perhaps a little too mainstream, with Goodfriend too hawkish on inflation and Liang too insistent on regulation. Both foundered in the Senate confirmation process and their nominations were not renewed by the new Congress.
So now Trump is getting more disruptive, naming trusted supporters who many think do not meet the minimum standards for the board. In late March he said he would appoint Stephen Moore, one of his economic advisers in the 2016 campaign and a prominent television commentator. Then last week said he would nominate Herman Cain, a pizza magnate who ran for president in 2012 and was a fundraiser for Trump in 2016.
Their mission, Trump made clear, would be to put pressure on Fed Chair Jay Powell not only to refrain from raising interest rates, but to cut them and get the economy back on a fast growth track. The thing is, the Fed is already moving in that direction. Futures markets tell us there is a 50% likelihood of a rate cut of a quarter to a half-point by year-end.
Whether the Fed’s famous pivot in January away from a gradual path of rate hikes and a balance sheet runoff on autopilot was due to presidential pressure or not becomes moot. It seems Trump was right all along in any case and the rate hike in December and perhaps that in September were a mistake.
Neither Moore nor Cain would be a shoo-in for Senate confirmation, and Cain may not even survive the vetting he will get to be officially nominated. His appointment is not as far-fetched as may seem, since he was active on the boards of the Omaha branch of the Kansas City Fed and eventually chaired the Kansas City bank itself. The regional banks usually have local business personalities on the board and rely on them for on-the-ground input on the economy.
The board of governors in Washington, however, is a different kind of animal, studded with Ph.Ds in economics or at least professionals with in-depth experience of banking and markets. Measured by these criteria, both Moore and Cain could come up short.
But it may not even come to that because Moore has a $75,000 tax lien on his property and a contempt of court citation on his record for failure to pay child support and alimony that many lawmakers are viewing as disqualifying. Cain was chased out of the 2012 presidential race by rumors of sexual infidelity.
It hardly matters, however, because Trump has made his point. The very use of the nomination process as a cudgel to beat policymakers into line has been disruptive enough.
If either Moore or Caine do run the gauntlet to get on the board, they will no doubt make a lot of noise and use their position as permanent voting members on the Federal Open Market Committee (FOMC) to dissent on decisions opposed by the president. But the real impact would come in the closed-door debates, where a concerted effort by these Trump appointees could tilt the balance for or against certain moves in a committee driven by consensus.
The FOMC hates to see one dissent among the 12 voting members, while two dissents make history. But it would take a lot more than a vigorous debate or dissenting vote to overcome the institutional entrenchment at the Fed. When all is said and done, there is little risk—despite some alarming commentary to the contrary—that either Moore or Cain could have any permanent effect on the functioning of the central bank.