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Political pressure on Powell is heating up. The Fed chairman has a plan for this.
A new wave of political pressure greeted Federal Reserve Chairman Jerome Powell and his colleagues when they met in Washington this week to discuss the direction of interest rates.
From the right, Republican presidential candidate Donald Trump again raised the prospect of ousting Powell from his job. “I know a lot about firing people,” joked the former president in an interview with a TV station in Arizona.
From the left, the comment came in the form of two new cards from liberal lawmakers calling on Powell to immediately lower interest rates. One letter, led by Senator Elizabeth Warren, concluded by telling the central banker: “You have kept interest rates too high for too long.”
But the political noise may have a limited impact, at least this week. This is partly due to the limited influence these politicians hold at this time, but also largely due to Powell’s own design.
The central banker has long set “data-driven” benchmarks (and tried to strictly adhere to them) for avoid the fate of predecessors considered too susceptible to changing political winds.
Powell claims his sole focus is on things like a strong jobs report last week as well as another inflation chart due on Wednesday morning.
Federal Reserve Chairman Jerome Powell looks on during a Financial Stability Oversight Council session at the Treasury Department on May 10. (ANDREW CABALLERO-REYNOLDS/AFP via Getty Images) (ANDREW CABALLERO-REYNOLDS via Getty Images)
Desmond Lachman describes this as a strategy of essentially painting yourself into a corner – intentionally.
“Given the way he’s set this up, the bar will now be very high for him to cut interest rates before the election,” said Lachman, a former managing director at Salomon Smith Barney now at the American Enterprise Institute.
“That’s really the box he put himself in,” Lachman added.
There is also little these critics can do at the moment. Trump has made it clear that if he wins, Powell will be unemployed no matter what he does, but the question is whether Trump would take the destabilizing step of firing him or simply let his mandate expire.
Mark Spindel, chief investment officer at Potomac River Capital and Fed historian, notes that both President Joe Biden and Powell would welcome the declaration of a soft economic landing, but Powell is fully committed to waiting for a consensus on the data.
“I don’t think Jay wavered in what he wanted to do, but I don’t think he wanted to get ahead of himself,” Spindel said, adding, “Certainly the window to offer political accommodation is before the election. . It’s closing fast.”
See more information: How much control does the president have over the Fed and interest rates?
The story continues
Trump’s continued pressure campaign
The Fed is widely expected to keep its rates at a 23-year high on Wednesday, meaning there will be no near-term relief from high borrowing costs.
These high costs – especially for getting a mortgage – are why many in the political world are pushing for faster action by the Fed to lower rates.
Housing is the reason the person questioning Trump last week — ABC15 Arizona’s Rachel Louise Just — raised the issue of monetary policy during her stop in Phoenix. Trump focused on interest rates and energy prices, saying: “With me, they are going down, interest rates are going down, energy is going down.”
But Trump refused to be more specific about Powell even after repeated questions, saying he would “do whatever it takes to make America great again.”
Former President Donald Trump speaks during a town hall on June 6 in Phoenix, Arizona. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)
Trump has said previously, as in a 2020 press conferencethat “I have the right to remove” Powell and also signaled that he would attack any move to lower rates before the election as a political move by Powell to help Biden.
And a recent Wall Street Journal report found that Trump’s allies had written a proposal that could seriously undermine the Fed’s independence and give the president a direct say in setting interest rates.
But for now, Spindel says Trump’s attacks are unlikely to change Powell’s behavior. The former president is already floating possible successors for Powell.
“I think a lot of what Trump’s attacks do undermine the integrity and credibility of the institution,” Spindel says.
Pressure from the left
Influential Democrats on Capitol Hill are also increasing their pressure with new letters to Powell.
The first it came from Democratic Senators Warren, Jacky Rosen and John Hickenlooper. The second it came from Sen. Sheldon Whitehouse, chairman of the Budget Committee, and Rep. Brendan Boyle, the top House Democrat on the issue.
Both focused heavily on housing costs while advocating to Powell to lower rates now.
“America also currently faces a housing supply crisis,” Whitehouse and Boyle wrote, continuing, “high interest rates exacerbate this supply crisis, increasing the costs of developing new housing while discouraging existing homeowners from upgrade to bigger houses.”
The case of Biden’s allies – which was repeated by a series of figuresincluding at least one former economic advisor to Trump – is that high interest rates make the inflation problem worse when it comes to housing.
Senator Elizabeth Warren (D-MA) speaks during a Senate hearing in January. (Kent Nishimura/Getty Images) (Kent Nishimura via Getty Images)
“It’s becoming a vicious cycle where Chairman Powell attacks the housing market and comes back again and says we need more data,” charged Bilal Baydoun, director of policy and research at the left-leaning Groundwork Collaborative.
Baydoun says Powell needs to change course, but worries that won’t happen because of politics and “the fear of being seen as someone who is tipping the scales.”
Biden was more cautious, but also commented on the Fed in the context of real estate. “I bet that little device that sets interest rates is going to go down,” Biden said in a March speech while discussing mortgages.
It’s a prediction he repeated several times in the following months.
See more information: What the Fed’s Rate Decision Means for Bank Accounts, CDs, Loans and Credit Cards
Chances of a ‘very boring’ June meeting
Powell may be able to stay out of the political fray this week, but it could become a more difficult task as the summer progresses.
Morningstar US chief market strategist David Sekera told Yahoo Finance in a live interview this week that the meeting could be “very boring” but a rate cut in the run-up to the September election is still a possibility .
“I think they will want to give that indication to the market at the July meeting,” he said.
Traders are currently projecting the chances of a rate cut before Election Day as essentially a coin toss. A tool that projects the trader’s vision, as of Tuesday afternoon, projects a 49% chance that there will be no flexibility between now and the September meeting.
The story is different when it comes to the end of the year, with traders projecting a nearly 87% chance of some easing before the start of 2025.
Lachman predicts Powell will let in as little political noise as possible when he speaks to reporters this week.
“I think he will ignore that” and instead focus on the technical aspects of the Fed’s work, he said. “He’s very skilled at that.”
But how Powell explains his position when it comes to the housing market will likely be closely scrutinized in the coming months.
Baydoun says Powell “needs to explain” his approach to this issue. He adds that housing is fundamental to how Americans view their future and “I’m quite confident that frustration over housing in particular will lead to greater scrutiny.”
Correction: An earlier version of this article misstated Rachel Louise Just’s name. We regret the error.
Ben Werschkul is the Washington correspondent for Yahoo Finance.
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