Powell’s Masterfully Mendacious TV Performance

 

Exquisite in scripting and rendition, Federal Reserve chair Jerome Powell’s January 11 social media video was extolled by the elites. Powell as the lowkey, principled public servant and essential guardian of our economy, unsoiled by the filth of politics, besieged by the tempestuous, despotic President Trump.

It was dastardly villain Mr. Potter, as if he’d been played by a deceptively noble and earnest Gregory Peck.

I’ll parse key moments in Powell’s production and lay out why Trump must overhaul his feckless Fed Presidential takeover strategy.

The Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment…This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. It is not about Congress's oversight role…Those are pretexts.

At least at the start of his video, Powell didn’t posture and prevaricate.

Whatever the issues regarding the rebuild of the Fed’s headquarters—lavish as it may be—and Powell’s congressional testimony regarding it, there is almost certainly no criminality involved. Trump’s accusations against Powell are, given his emboldened stance in the video, a futile “pretext” to force the Fed Chair’s  resignation.

Trump previously fired Fed Board of Governors member Lisa Cook, based on allegations she committed mortgage fraud prior to taking office. The judge in Cook’s wrongful termination lawsuit ruled the President lacked adequate “cause” under the Federal Reserve Act, since Cook’s alleged misconduct occurred before she joined the BOG (though the law doesn’t spell out what constitutes adequate “cause”), and that she was denied due process. He temporarily blocked her removal, which the Trump Administration appealed, but the U.S. Court of Appeals for the DC Circuit declined to stay. On January 21, the Supreme Court heard the Trump Administration’s appeal and is expected to render a decision by summer.

That Trump targeted the brilliant—and, as the first Black female BOG member, trailblazing—Cook, is a racist abomination.

But beyond the apparently lame allegations against Powell and Cook, malfeasance is a weak predicate for Trump to remove BOG members. And it’s a wrongheaded diversion from what could be robust legal rationales for a President having authority over the Fed, with the right to remove any BOG member or top official. 

If a President is only able to do so under the pretense of ethical lapses, that will give him or her very few, if any, opportunities to make additional BOG appointments and do nothing to allow a President to rightfully steer Fed policy.

There are two better options for Trump or, if he’s unsuccessful, a future president.

Unfortunately, in the Cook firing litigation, Trump’s Solicitor General may have undermined the cause. Apparently, he conceded that a Fed BOG member (and thus, the Chairman), can’t be removed by a President because of policy differences. The Department of Justice must quickly push that toothpaste back into the tube with amended filings!

Alternate “for cause” dismissal under the FRA

There is a more viable “pretext” for Trump to fire Powell under the FRA than malfeasance. The FRA states that BOG members can be removed for "inefficiency, neglect of duty,” as well. The President would be more than justified in removing Powell based on those criteria.

Let’s review Powell’s ignominious past five years as Fed chief.

Our post-pandemic inflation spike took hold just a few months after President Biden took office. Very little of the increased spending he enacted had made its way into our economy. However, due entirely to the pandemic, we were beset with a dire shortage of workers and crucial Taiwan computer chips; our entire supply chain was in shambles; oil production in the U.S. and Mideast had been drastically curtailed.

In the midst of this inflationary economic calamity, Putin’s evil Ukraine invasion took much of Russia’s oil off the market and “Breadbasket of Europe” Ukraine’s grain exports were cut sharply, further ratcheting-up global oil and food prices.

Obviously, it was this confluence of black swan events, not low Fed interest rates, that set-off the ’21-’22 elevated inflation. Once oil production, labor availability and the supply chain normalized, it collapsed to less than 3%—this as more and more of the supposedly inflationary Biden-enacted spending coursed through our economy. 

Yet, incomprehensibly, Powell responded to that inflation spike—though it was 100% due to the pandemic—by actuating a rate-hiking binge unprecedented in magnitude, rocketing the Fed Funds rate from near-zero to over 5%.

Amid this reckless Powell spree, the much maligned Biden post-pandemic spending may well have prevented economic catastrophe.

But, nevertheless, Powell’s unconscionably excessive Fed rates, and his arrogant refusal to redress his error by fully, quickly unwinding them, have enervated our economy, gravely injured our middle class and destroyed “affordability.” 

• Employers announced 1.2 million job cuts over the past year, up more than 50%. Many believe we’re now on the brink of a job wrecking recession. How “affordable” is life when one is out of work?
• The long-belated spurt in middle and low income worker pay during the pandemic has stalled. The Powell Fed is guided by the noxious notion that wage increases for average workers are “inflationary”—but not bulbous corporate profits (at an all-time high relative to Gross Domestic Income, while pay is at an all-time low) or stratospheric compensation for the scintilla of top earners.

• The Powell Fed-catalyzed mortgage rate explosion has priced millions out of the home buying market—the fastest housing affordability decline ever. Some buyers face monthly mortgage expenses of over 50% of their take-home pay, far exceeding traditional budget guidelines (like the 28% rule). Millions of households are now unable to qualify for loans; even with the recent modest mortgage rates decline, income thresholds are too high.

In his cynically crafted video, Powell evades this middle class horror story and fails to explain why—to invoke his words—he’s ignored the alarming economic “evidence” and pursued policies that have glaringly failed to “serve the public.”

Given the precarious state of our economy due to his gross monetary malpractice, Powell’s recent Fed rate reduction is appallingly inadequate. The Fed Funds rate should be, at most, 2%, not near 4%.

Yet, Powell pompously claimed to be the courageous upholder of the Dual Mandate set out in the Federal Reserve Reform Act of 1977:

I have carried out my duties without political fear or favor, focused solely on our mandate of price stability and maximum employment…

Public service sometimes requires standing firm in the face of threats.

I will continue to do the job the Senate confirmed me to do with integrity and a commitment to serving the American people.

As I’ll lay out later, the “price stability” half of the “Dual Mandate” in the 1977 Federal Reserve Reform Act to which Powell alluded is, itself, problematic. And the Fed Chair certainly hasn’t obeyed the co-equal second half of the law’s Dual Mandate: to conduct policies aimed at achieving maximum employment. Powell has cavalierly disregarded “the evidence” that  inflation is contained but housing affordability, employment and wage data is ominous. If this flouting of the 1977 statute and policy dereliction isn’t “inefficiency” and “neglect of duty” allowing for “cause dismissal” under the FRA, what is?

Presidential Fed control based on Constitution and history

For Trump or a future President, this strategy option would be overarching and potentially dispositive, as it goes to the core of our flagrantly flawed Federal Reserve scheme. 

Though he framed it pejoratively, Powell stated the central issue:

(This) unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.

The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public rather than following preferences of the President.

This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions—or whether instead monetary policy will be directed by political pressure or intimidation.

Given how our middle class has been bludgeoned by the Fed’s sky-high interest rates, Powell’s “best assessment of what will serve the public” has been shown to be disgracefully defective. Had Fed policy been aligned with what Powell implicitly maligns as the “preferences of the President”—unlike the Fed chief and his clueless BOG cabal, elected by the people—interest rates would be much lower and our economy almost certainly far stronger.

Powell’s supercilious attitude is galling given that vaunted “Fed independence” is constitutionally suspect and historically invalidated. For starters, the words "independent" and "independence" regarding the Fed are nowhere to be found in any of its governing law.

The Fed chair and BOG possess power equaling or exceeding most executive branch officers, yet are incorrectly considered to be completely outside the supervision of the elected president. This is totally contrary to Article II given the Fed’s outsized impact on our country.

The unelected, heretofore deemed unfireable, seven-member BOG (smaller than a jury!), only a few members at a time appointed by a President, lorded over by its “unfireable” Chairman (only once in the Fed’s 113-year history has a Fed Chair been outvoted), meeting in secret, wantonly wields a wand setting interest rates that dramatically affect our economy and determine our government’s borrowing cost for its massive debt, what Americans pay for their debt—mortgages, car loans, credit cards, and what businesses pay to finance inventories and job creating expansion.

After every Fed Open Market Committee meeting (where interest rate policy is set), titans of politics, business, finance, economics and journalism breathlessly await the Chairman’s emergence from the Fed Star Chamber to pronounce monetary policy decrees that will profoundly affect the populace.

This egregiously anti-democratic construct would be appalling to our Founding Fathers. 

Though palpable dread the U.S. might devolve into “mob rule” paralleled our Founders’ fear we might slide into tyranny, the Constitution they crafted did not permit any area of governance—irrespective of its enormity or complexity—to be kept outside the control of the people. The prevailing notion that this somehow excluded monetary policy is utterly ungrounded.

The Fed’s Central Bank progenitor, the First Bank of the U.S., was reviled by Thomas Jefferson and other Founders as a menacing concentration of economic power. Treasury Secretary Hamilton went through political hell getting it established, though the First Bank had nothing approaching the overweening power of our Fed.

Until 1952 (nearly 40 years after the Fed's inception), it was unquestioned that the Department of the Treasury, under its Presidentially appointed and removable Secretary of the Treasury, controlled Fed policy. To use Powell’s parlance, Treasury ensured our Central Bank operated according to the “preferences of the President” (as conveyed by his Treasury Secretary), not the Fed’s “best assessment.”

Notably, during World War II, Treasury directed the Fed to keep its interest rates low and buy Treasury securities to facilitate financing of the war.

Then, with no economic justification, Treasury’s Fed supervision was abruptly ended with the 1951 “Fed-Treasury Accord.” It was a backroom deal between those two entities, not a law. This pernicious pact invented what’s now spuriously sanctified as “Fed independence.” No law or court ruling ever prohibited or limited the previously long-established Treasury power over the Fed.

So Treasury Secretary Bessent could rip-up his department’s unconstitutional 75-year-old “Accord” with the Fed tomorrow and reassert authority over our Central Bank.

President Reagan set an even more dramatic precedent.

In 1982, Fed Chair Paul Volcker—who actually had said, “Americans live too well”—unleashed a not only unnecessary but unhinged, scorched-earth monetary policy, ostensibly to contain rampant inflation (the real reasons for which I’ll outline below). It incited, in unemployment rate, the most horrific recession in our history between the Great Depression and the pandemic.

By early 1983, on the heels of the horrendous recession he’d set off, Volcker had reduced the Fed Funds rate to less than half its ghastly 19% peak. Then, just as our moribund economy had started recuperating, Volcker resumed his reprehensible rate hiking—vaulting the Fed Funds rate to over 11%. Reagan and his team were alarmed—if rates continued climbing and another downturn ensued, it would imperil their reelection campaign.

According to Volcker’s autobiography, before the 1984 Republican convention, Reagan Chief of Staff Jim Baker summoned Volcker to the President’s hideaway office adjacent to The Oval. With Reagan sitting quietly at his side, Baker firmly told Volcker, “The President is ordering you not to raise interest rates before the election.” The normally imperious Fed chief not only acceded, but began lowering rates—and never went public with Baker’s directive.

That meeting very likely prevented a retreat in the recovery and ensured Reagan’s reelection. It’s no wonder Reagan stymied Volcker’s rate raising when he did: the powerful 1984 Reagan convention film celebrated the lower interest rates and the country’s economic turnaround, as did his campaign’s iconic “Morning in America” TV ads. 

Despite a continued plunge in Fed rates—and Reagan tripling our national debt in a mere eight years—inflation remained tame for more than three decades.

So, clearly, Fed obedience to the Executive Branch isn’t unprecedented, unconstitutional or destabilizing. Quite the contrary. The Treasury Department’s dictates to the Fed were essential to America’s World War II victory—enabling us to feasibly finance what would be, relative to today’s GDP, tens-of-trillions in debt. And millions of Americans benefitted from Reagan’s economic policies once they were no longer being sabotaged by an unrestrained Central Bank.

Per Article II of our Constitution, other than judges (who are, of course, in the Judicial Branch), a president can remove and replace anyone a President has appointed. More than a century after our nation’s founding, laws were enacted that  improperly limited this power through the formation of unconstitutional figments, “Independent Agencies,” including the Fed. In our Central Bank’s founding law, the 1913 FRA, Congress delegated to the Fed its constitutional power to control money creation.

As Article I assigns "all legislative Powers" to Congress, can that body cast-off to another entity an enumerated power as fundamental as controlling our nation’s money supply? It would seem difficult to rationalize this as Congress merely employing the Necessary and Proper Clause, as the Fed ceded all monetary authority to the Fed, with no congressional review or ability to overrule its decisions. Thus, the “Congressional Oversight” of the Fed to which Powell feigned reverence in the video is, as he well knows, an almost meaningless patina. So some would argue that the Fed is on shaky constitutional ground to start with.

Even if one stipulates the FRA is constitutional, the fact that it grants the President the power to appoint its BOG and Federal Reserve Bank presidents would seem to inherently affirm that those appointees serve at the pleasure of the President. Again, there are no Presidential appointees specified in the Constitution—with the sole exception of judges—that a President cannot remove. Nor does our founding document even envision such presidentially unfireable officeholders.

The Constitution permits our President to send troops into harm’s way, negotiate far-reaching treaties, declare national emergencies. That he or she isn’t also allowed to set interest rate policy, when it’s often the  most salient element in economic policy, is antithetical to the foundational first principle of our country: “The people rule.” When it comes to implementing such momentous federal policies, the people rule through their elected President.

And, as outlined earlier, it’s contradicted by the nearly four decades Secretaries of the Treasury oversaw Fed policy.

The Fed is not a separate branch of government, it was not created by our Constitution, its BOG is not elected. Irrespective of its members’ intelligence, academic heft, civic-mindedness or munificence, the Fed BOG cannot constitutionally be allowed to unilaterally hold the power over something as economically potent as monetary policy, insulated from Presidential control.

If Presidents are denied authority over the Federal Reserve and the ability to remove its BOG members and FRB presidents, they can’t possibly carry out, next to national defense, their most important duties: implementing the economic policies for which they were elected.

Many fear economic Armageddon if the Fed is again controlled by the President, believing our Central Bank is a crucial bulwark against runaway inflation. This, too, is contravened by our history. In fact, Fed actions have too often been horribly deleterious.

First, the truth is, worrisome inflation in our economy is, for the most part, a myth.

It has only occurred:

• Amid major wars (which Vietnam certainly was by 1968) and their aftermath
• Post-pandemic—war-like in its inflationary effect
• During the mid-1970s through early 1980s inflation perfect storm:
• OPEC boosted oil prices to, when they peaked in 1981, more than 10-times what they were in 1972—as U.S. oil production was imploding.
• Nixon allowed the USSR to virtually corner the global grain market after it suffered a bad harvest, causing U.S. food prices to surge
• In 1971, with inflation just over 5%, Nixon imposed wage-price controls for a blatantly political reason: to forestall the Fed from raising interest rates before his 1972 re-election bid—further testament to the Fed’s illegitimately excessive power. Who concocted this kooky scheme? None other than then-Treasury Department official Paul Volcker!

When the Nixon controls were eased, wage and price increases were amplified as workers and businesses offset what they’d lost amidst the controls—and padded them as a margin of safety in case they were reimposed. Indeed, after that self-inflicted additional inflation jolt, in 1973 Nixon clamped-down with a freeze on prices.

When this insane wage-price controls regime ended in 1974, wages and prices again shot-up, almost certainly more than they otherwise would have.

Clearly, every one of our episodes of high inflation resulted from war- or pandemic-caused broad shortages of goods and/or labor, or major oil price shocks—not too much money in the economy or low interest rates (see my prescient on inflation, widely read ‘22 The Hill column: https://bit.ly/4qNOCaV).

Though outside such periods seriously elevated inflation has been the oft-prophesied apocalypse that has never come, the Fed incessantly acts as if hyperinflation is around the corner. It has repeatedly wreaked ruinous recessions with outrageous interest rate increases to “fight inflation”—when there is zero empirical “evidence” Fed monetary tightening stems price spirals, other than by inducing economic cardiac arrest. Worse, even in the absence of problematic inflation, the Fed has tightened to pierce perceived asset bubbles, which is not part of the Fed’s legally laid-out mission.

The 1929 stock market crash and resulting Great Depression were caused by stunningly maladroit Fed policies. It had initiated severe monetary tightening—despite almost nonexistent inflation—to pierce what it believed to be a stock market bubble. Despite the metastasizing panic and tragic economic carnage precipitated by its daft interest rate increases, the Fed refused to expand the money supply or bail out failing banks. Only when Franklin Roosevelt was inaugurated did this crushing monetary mismanagement come to an end.

Fed Chair Alan Greenspan at least helped incite the 2000 Dot-Com stock market crash and subsequent recession by more than doubling the Fed funds rate from its 1993 trough. In a wretched reprise of the Fed’s absurd 1929 mindset, though inflation was below three-percent, Greenspan launched his idiotic Fed tightening to temper what he called the stock market’s “irrational exuberance.” (Again, not the Fed’s job!)

The underbelly of the early-2000s housing boom was rampant reckless, in many cases, fraudulent, subprime mortgages—enthusiastically fostered by quasi-governmental mortgage underwriting behemoths Fannie Mae and Freddie Mac. Meanwhile, Wall Street mortgage securitization and appallingly unregulated Credit Default Swaps (CDS) proliferated.

But the housing collapse, and resulting financial crash and Great Recession, were instigated by an eruption in mortgage rates caused by Greenspan quadrupling the Fed Funds rate from 2004 until he left office in 2006. Blessedly, the hockey-stick Fed Funds rate trajectory ended under his successor Ben Bernanke, who stabilized rates before the financial crash, at which point he sunk them to near zero and instituted then-exotic Quantitative Easing—bold actions that saved us from an even more wretched recession. As was the case a decade earlier, Greenspan commenced his rate raising rampage despite low inflation (just over 3%). Absent the Greenspan-triggered crash, there might well have been time for the government to rein in Fannie and Freddie and begin strictly regulating CDS, without an economic cataclysm.

What made the severe 2020 pandemic economic contraction  the shortest recession with the most dramatic snap-back in our history was, along with massive government spending, the Powell Fed, following Bernanke’s playbook, drastically cutting rates and launching QE4. What happened to that once rational Jerome?

And few people are aware there's ample evidence that sustained high Fed rates not only trigger recessions but, instead  of attenuating inflation, actually exacerbate it.

The cost of money is a huge expense, among the biggest borne by businesses and individuals. Increases in Fed rates are reflected in higher mortgage rates, rents (driven up because, unable to afford to buy houses amid oppressive mortgage rates, folks flock to the rental market), car loan and credit card rates. This leads to higher wage demands—which are passed-on by businesses (along with their own Fed-fueled higher borrowing costs) in price increases. Simultaneously, excessive Fed rates choke-off investment, hampering our economy’s ability to expand productive capacity—which diminishes the supply of goods and thus raises prices.

The Federal Reserve Reform Act of 1977 doesn't include the word inflation. It says the Fed shall seek to "maintain price stability"—the first time since the Fed's creation it was given any legally stated role in that area, and vaguely worded at that. What level of annual inflation constitutes price stability isn't even specified in the law. Is it the Fed’s sacrosanct 2% benchmark, which arose from an offhand remark to the media by New Zealand's finance minister decades ago? Or the 3%-plus U.S. average over the past century? Or the 4%-plus average during  the George HW Bush presidency?

For the average middle class household, the difference between 2% and 3% inflation is $65 per month. This would be swamped by the lower mortgage, car loan and credit card interest rates middle class households would pay, and the increased jobs and higher incomes that would result, if the Fed Funds rate was capped at 2%.

Contrary to conventional wisdom and the Central Bank’s erroneous ethos, low Fed rates and low inflation accompanied our periods of greatest peacetime prosperity (2½ annual GDP growth is considered healthy):

• The Roaring '20s (during which we periodically experienced deflation) Fed rate less than 4%; 4% GDP growth , 1% inflation
• 1934-Q1 1937 Fed rate less than 2%; 10%+ GDP growth, 2% inflation
• Post-Korea 1952-pre-Vietnam-peak 1967 (more than 15 years) Fed rate averaged less than 3%; 4% GDP growth, 2% inflation.
• Mid-late 1990s Fed rate averaged 3%; 4%+ GDP growth, 2.5% inflation (longest peacetime boom in history; hit lowest inflation rate since early 1960s)

So history not only discredits—but is the inverse of—the Fed’s economically debilitating dogma; what Powell ridiculously calls his BOG’s “best assessment.” 

It’s clearly evident that monetary policies are not the root cause of troublesome inflation. Given our Central Bank’s abysmal history, the Fed should have no role regarding, and be barred from taking any action aimed at affecting, inflation. The data inarguably shows that accommodative Fed policy which fosters economic expansion leads to low inflation!

Even former Fed Chair and Treasury Secretary Janet Yellen—who has a stellar economics academic pedigree and is certainly not a rogue in the field—affirmed this in a speech:

The Federal Reserve may be able to run the economy hot, yielding significant benefits to workers, while imposing only minimal costs on society in terms of the higher inflation…a high-pressure economy improves upward mobility. 

Yet, despite the mountain of “evidence,” Powell’s Fed ruthlessly strives to attain its arbitrary 2% inflation target by maintaining inordinate interest rates—strangling crucial investment and innovation, further overvaluing the dollar, which distends our monstrous, dangerous trade deficit and, worst of all, meting out widespread misery.

And Powell’s moronic, malevolent M.O. is incessantly enabled by the addled inflation alarmists who abound on TV and the internet—including a horde of economists (better described as economythists). Much to the disservice of our country, elite-ingratiating and intellectually indolent news organizations and journalists lap-up their detestable drivel and, worse, provide them a platform.

Democrats should cease their vociferous criticism of Trump’s effort to control the Fed, and, instead, champion it. Trump will not always be President. The Fed’s reflexive austerity is diametrically at odds with the Democrats’ stated economic priorities: aiding the struggling middle class and enabling ascent of the economically disadvantaged. 

Presidential authority over the Federal Reserve would do more than anything else to attain those Democratic Party aims.

And it would do much to turn around dismal voter perceptions of Trump’s and Republicans’ economic performance by supercharging investment and job growth while increasing incomes and affordability.

In our economic predicament, and given the enormous challenge of maintaining economic supremacy over cutthroat China, we must have a new, creative, pro-worker, pro-growth Central Bank philosophy. That will only happen when elected Presidents rule over our Fed, instead of politically unaccountable, dictatorial disciples of toxic economic orthodoxy.