Sticks and stones

It was only a matter of when, not if, the White House would harass the Federal Reserve again. Chair Powell got a short respite as President Trump reiterated Sunday he doesn’t intend to fire him, despite constantly demanding lower interest rates. After the Federal Open Market Committee (FOMC) announced yesterday it had held rates steady, Powell refused to take the bait from reporters about his relationship with the president over rates and his employment, and no bomb was launched from Truth Social.

That changed this morning, when Trump posted: "‘Too Late’ Jerome Powell is a FOOL, who doesn’t have a clue." Oh well. Perhaps Powell at least got a good night’s sleep.

While this latest salvo was “just” an insult and not another threat of termination, in recent weeks there has been a great deal of speculation about whether a president can in fact dismiss a Fed Chair. The answer has always been assumed to be no. There’s typically a difference of opinion between the two, but previous administrations have seemingly viewed the political blowback to be too severe.

Lately, we have learned that the answers to many previously unthinkable questions have changed—that what was once black and white could in fact be gray. Perhaps the White House will find a loophole. Or, if the Supreme Court upholds its recent removal of independent directors on the National Labor Relations Board, the administration might try the dramatic step of reshaping the composition of the FOMC. That might be necessary if Trump wants the new chair to acquiesce to his views on monetary policy: the nominee must come from the group of standing Fed governors, who have almost exclusively voted with Powell over the years.

But I’d argue that the important question is not over the technicality of whether he could be fired—because the answer does seem “maybe”—but whether in the midst of unsettling bond and equity volatility, this should still be considered at all. We have heard the bond market respond with a resounding “no." That Treasury volatility likely led to the 90-day delay and to Trump tempering his assault on the independence of the Fed.

Back to the FOMC meeting itself. The Fed kept the fed funds target range at 4.25-4.5%, noting in the statement the increased risk that tariffs could have of leading to higher unemployment and inflation, the two sides of the Fed mandate. This continues to put the Fed in a tough spot, in spite of Powell’s repeated assertion that the economy is doing just fine. Over the course of his press conference, he said uncertainty has risen, but policy is well positioned to wait for further clarity. This is a Fed seemingly content to be reactive rather than preemptive. But it is destined to be behind the curve should it wait to see the whites of inflation’s eyes before cutting rates.

Futures contracts retraced expectations for a June cut to less than 20% from more than 60% before last Friday’s employment report. We think it will take until the third quarter for the Fed to feel comfortable enough to take that step.