Under Powell, the Fed has continued to raise US rates and steadily withdraw liquidity from the US economy as it unwinds the $US3.6 trillion ($5.1 trillion) of purchases of bonds and mortgages it made during its post-crisis quantitative easing programs.
Only last week, the Fed raised the federal funds rate by 25 basis points and pointed to the likelihood of two more rate rises next year.
Trump, and some in Wall Street, blames the Fed for the meltdown in the US sharemarket, which has fallen more than 17 per cent since early October.
The Fed’s rate rises this year and the pre-programmed $US50 billion a month shrinking of the pile of bonds and mortgages it holds – which were clearly foreshadowed and priced into markets – are only part of the explanation for the market’s plunge.
Of greater significance has probably been Trump’s yet-to-be-resolved trade conflict with China, the continuing instability and dysfunction in the White House and, most recently, the “shutdown’’ of the US government over Trump’s demand that Congress provide funding for the wall that he now describes as his beautiful steel-slat barrier.
While Trump, according to the Mnuchin tweet, denies suggesting firing Powell, the reports – the original report was from Bloomberg but it was followed up by other major media outlets – that he had discussed whether he could and should fire the Fed chairman are consistent with Trump’s general approach to governing and fit with his increasingly strident criticism of Powell.
While there is an argument that he can’t sack the chairman of the Fed unless there has been some major impropriety, the more interesting question is what might happen if he did.
Financial market participants, unsettled by the market plunge, are urging Trump to act to stop the Fed from continuing to raise rates and reducing its bond and mortgage holdings, and claiming that firing Powell would re-ignite what had been a near decade-long bull market.
Others predict financial market chaos if Trump intervenes, predicting a massive sell-off of the US dollar, an even bigger fall in the sharemarket, rising market interest rates because of the Fed’s loss of credibility as an independent central bank, and a sharp economic downturn.
Financial markets have, of course, been underwritten by the Fed’s post-crisis monetary policies, which kept rates ultra-low and pumped massive injections of cheap liquidity into the financial system.
Those policies inflated financial and real estate assets to an extent that, before the market meltdown, they had arguably created financial bubbles in the US and elsewhere.
Trump’s tax cuts and increased spending, occurring as they did at a moment when the US economy was already performing strongly, forced the Fed to move more aggressively to pre-emptively head off the prospect that the US economy could overheat and generate a resurgence of inflation.
Since the mid-1980s, there has been a widespread (although not unanimous) view that it is important and useful to have a central bank that is largely independent of the government of the day.
The key responsibilities of most central banks, including our Reserve Bank, are maintaining price stability by targeting and containing inflation, pursuing full employment and protecting financial stability. The central banks are focused on their domestic economies rather than influences like financial markets, except to the extent that they might affect the real economy.
Where politicians would want monetary policies to boost their popularity and prospects of re-election – Trump, until recently, had pointed to the booming stockmarket as an indicator of the success of his policies – the central banks have a longer-term perspective.
Where Trump, with his tax cuts and big spending increases, provided a pro-cyclical boost to an already strong economy, central banks tend to err on the side of counter-cyclicality, searching – with limited and quite blunt instruments – for that sweet spot where economic growth is neither too strong, risking inflation, nor too weak, threatening recession.
The Fed is trying to normalise US monetary policies after nearly a decade of unconventional policy measures. Financial markets that were inflated by its policies – that have relied on its ultra-cheap liquidity to underwrite their risks – were inevitably going to be deflated.
Even without Trump’s erratic style of governing, his trade policies and his assault on post-war global institutions and settings, it would have been a difficult and delicate process to normalise those monetary policy settings without causing severe financial market disruptions. Sacking the Fed chair wouldn’t obviate the need to move towards more conventional policy settings.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.