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A few years ago, shortly after Jay Powell was appointed chair of the US Federal Reserve, I spotted him sitting in a central bankers’ meeting. He looked like the class swot: as his counterparts gossiped nonchalantly, Powell sat in the front row, diligently taking notes during every speech.
The reason? Since Powell lacked the economics PhD and/or professorship boasted by predecessors such as Ben Bernanke (his earlier career was in law and finance), he was doubly eager to “prove” his credentials. He thus seemed particularly anxious to be a good steward of the central bank, ever mindful of how he might be judged in the financial history books.
Donald Trump should take note. In recent days, the US president has repeatedly attacked Powell over his alleged reluctance to loosen policy, dubbing him “Mr Too Late” and “a major loser” on social media.
A cynic might view this as political kabuki. After all, Trump will need someone to blame if his tariff policies unleash a recession, as seems likely, and Powell is an easy social media scapegoat. But, kabuki or not, investors are (quite rightly) very rattled: the prices of the dollar, bonds and equities have all tumbled together, which is highly unusual.
Doubly so, since the attack on the Fed was seemingly endorsed on Friday by Kevin Hassett, director of the National Economic Council. Hassett is considered one of Trump’s more orthodox economic advisers and previously supported Fed policies.
As markets gyrate, investors should consider three points. First, Powell is extremely unlikely to capitulate, given his personal characteristics — and that desire to be a diligent steward of monetary policy. Indeed, I fully expect him to defiantly go to the wire in order to serve out his term as Fed chair, which ends in 2026, and probably his seat on the board of governors too, which ends in 2028.
Second, different aspects of the Fed mandate have differing levels of legal defence. On January 20 and February 18 this year, the White House issued two executive orders that seem to undermine the central bank’s control of financial regulation.
The Fed has not yet challenged this in public. That is notable. It might be because many lawyers think it is on shaky legal ground, or because there is less urgency given that there is already some common ground between the White House and Fed, on, for example, the need to reform rules around bank leverage ratios.
However, it also underscores another point: Fed officials think their top priority is to defend their mandate around monetary policy at all costs. And here, unlike with financial regulation, Fed lawyers think they are on very strong ground.
One reason is that there is a 1930s legal ruling that seems to protect agency independence. And while that is currently being tested, the Constitution also gives Congress — not the president — authority “to coin money”. Congress has delegated this to the Fed. Thus, as Powell recently observed, “our independence is a matter of law”.
Third, even if Powell’s confidence is breached by the Supreme Court, he knows that investors — and most US politicians — back central bank independence. Moreover, recent events suggest that Scott Bessent, Treasury secretary, does not want bond yields to soar.
This does not guarantee that Trump won’t turn his kabuki into action — he is mercurial, after all. But it does mean Powell’s defiance will be backed by the wider Fed board, meaning that Trump is not just fighting one man.
Expect this to run and run — particularly if stagflation hits, which, of course, would put bond markets in even more danger.
gillian.tett@ft.com
