Photo by Joshua Hoehne on Unsplash
[Editorial note: See postscript at the end]
It’s come down to this: President Donald Trump versus Fed Chairman Jerome Powell. In the old days (pre-2000) it would have been fought, on a metaphorical basis, in the boxing ring or in a Texas Steel Cage Match. Now with the popularity of mixed martial arts, and the rise of the WWC, it takes place in “the Octagon.” Where Ultimate Fighting Championships (UFC) are fought.
As an aside, the UFC is owned by TKO Group Holdings (TKO), headed up by Trump partisan Dana White. While that has nothing to do with the Trump-Powell fight, it does have plenty to say about The President’s popularity in the UFC world. Additionally, Carly made the addition of TKO to our Consumer Discretionary strategy a few weeks ago as a pairing with Netflix (NFLX). If you read one of Carly’s first My Two Cents over a year ago, you would remember she has kept her eye on these holdings for some time and we have seen some great progress.
Who Is Jerome Powell?
Powell began his professional career as an attorney, from there he moved over to the world of investment banking and private equity. He was appointed to the Federal Reserve by President Barak Obama together with Jeremy Stein in 2012. Stein was seen as a Democratic appointment and Powell a Republican appointment in an effort to garner bipartisan support for their apporvals. It worked. However, at the time, whereas Stein was a professor at Harvard Businees School and well known in economic circles, Powell was not. He was in many ways a wildcard outsider appointment.
In November 2017 President Trump, in his first term of office, nominated Powell to become Fed Chair. Apparently, Powell was one of five candidates for the role, including then Chair Janet Yellen. At that time Powell’s appointment was met by approval from the financial markets.
Powell’s Performance – Trump 45
Upon taking office, Powell continued the mild tightening of rates from a zero Fed Funds Rate established as a result of the 2008 Financial Crisis. By December 2018 the Fed Funds rate stood at a range of 2.25% to 2.50%.
This is when things become ugly. Powell signaled that the FOMC would continue to hike rates in the coming year. The stock market got hit hard in December 2018 with the Standard & Poor’s 500 Index (SPX) declining between 9% and 10% for the month. President Trump, a real estate professional by trade, wanted rates to remain where they were or decline and was not too happy with Powell’s comments and the effect it had on the stock market, especially as the year was sunsetting. That was when he first considered firing Powell.
Inflation was running below the Fed’s 2% target, thanks to Trump’s fiscal and tax policy. Powell must have gotten the message that he tightened too much and instituted three 1/4% rate cuts in 2019. That got Powell off the hook.
2020 was an exceptional period of time as the global economy plunged into the COVID-related recession. Powell had no choice but to reduce rates back to the 0% to ¼% Fed Funds Range.
Powell’s Performance Under Biden
Donald Trump lost his first bid at reelection to Joe Biden. Powell was renominated for a second term as FOMC Chair by Biden and approved by the Senate. Biden went on an unprecedented series of fiscal spending programs. This resulted in a surge of debt issuance and inflation rates not seen since the Jimmy Carter administration. To combat inflation, Powell’s FOMC raised rates on eleven occasions in 2022 through 2023, elevating rates back up to a range of 5.25% to 5.50%. Seeing that the economy was in or near a recession and rate increases overshot a reasonable target, Powell cut rates by 1% in the last four months of the 2024. Some would argue that he was trying to sway the election but that is a difficult argument to make.
Another problem was created. In order to fund the trillions of dollars of debt, Treasury Secretary Janet Yellen (former FOMC Chair) preferred to issue short term rather than long term debt. That was OK if we could refinance at lower rates. That is a big IF.
Enter Trump 47
Powell’s Performance – Trump 47
Now the Trump-Powell fight entered a new level, and they entered the Octagon slugging it out. In the first three months of the Trump administration, inflation has subsided, and job creation is strong. Economically, Trump is repairing the remaining damage from the Biden administration. The President wants lower rates to help spur the economy, offset the short-term effect of a new tariff regime, and refinance the Yellen debt, some of which comes due soon at low rates.
Powell is resisting cutting rates further. He is waiting for more economic data (that’s always a convenient economic excuse) and fears the impact of tariffs, even though there is no empirical evidence and its just theoretical right now.
Trump’s had enough. He wants to body slam Powell and fire him finally before Powell’s term runs out in 2026. But can Powell be fired?
Who Runs the Federal Reserve?
This is an interesting question. The Federal Reserve was established by the Federal Reserve Act of 1913. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy, which is done by the Federal Reserve Open Market Committee (FOMC). Members of the FOMC are nominated by the President and confirmed by the Senate.
So who does the Federal Reserve work for? Well, it is considered an independent regulatory agency. Here is a very good summation of what the President can and cannot do by Daniel Horowitz law firm. Horowitz and other experts on the matter say that Powell can only be removed for cause. This brings up the question did Powell commit nonfeasance, misfeasance or malfeasance? It’s a matter of opinion.
According to President Trump, since 2017, there are enough reasons for Powell’s action or failure to act which may constitute reason “for cause.” If the President were to try to remove Powell, it would be litigated in court and may take some time. Powell is refusing to step down. So, if the President wants to pick a fight, go ahead. I am no fan of Powell as I think his performance has been poor. However, most likely, the President will use his bully pulpit to beat down on Powell, as he has more fights on his hands right now. Then in another year, Powell’s term is up, and he will be gone forever.
Post Script
I could not believe what has occurred. It took several hours to write the above. Then after it went in for editing, there was an announcement from The White House to the effect that Trump has no intention of firing Fed Chief Powell. I guess my final conclusion was spot on that Trump had to pick his fights and this was not one he wanted now. My guess is that Trump and Powell had a heart-to-heart talk behind the scenes. At the very least I gave you a good history of the last eight years of what occurred with Trump and Powell and a little bit of insight into the formation of the Federal Reserve.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long NFLX & TKO - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situation.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
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