Introduction to the Federal Reserve
The Federal Reserve, the central bank of the United States, is facing a critical period. With only three scheduled policy meetings remaining in Jerome Powell’s eight-year stint as the world’s top central banker, the typically smooth transition has become a potentially disruptive period. Powell is expected to hold interest rates steady at the meeting, but the decision is overshadowed by a Trump administration criminal investigation of Powell, an evolving effort to fire Fed Governor Lisa Cook, and the coming nomination of a successor to take over for Powell in May.
The Impact of the Investigation on the Fed
The investigation into Powell and the effort to fire Cook have raised concerns about the Fed’s independence. The Supreme Court may rule on whether Cook can be removed by the president, which could set a precedent for future attempts to exert control over the central bank. Meanwhile, Powell faces the decision of whether to stay on as a Fed governor under his successor, which could impact the bank’s policy decisions.
The Search for a New Fed Chairman
The Trump administration is expected to announce a nominee to succeed Powell soon. The finalists include Trump economic adviser Kevin Hassett, Fed Governor Christopher Waller, former Fed Governor Kevin Warsh, and BlackRock’s chief bond investment manager, Rick Rieder. Whoever is chosen will need to convince other Fed governors and regional bank presidents of the need for any rate cuts, regardless of Trump’s wishes.
The Current State of the Economy
The Fed’s benchmark interest rate is currently in the 3.50%-3.75% range, and policymakers are expected to leave it unchanged. Economic data since the last meeting has shown little change in labor market or inflation trends, offering scant impetus for guidance on when rates might fall again. Job growth has been weak, but the unemployment rate dipped in December to 4.4%, amid strong economic growth and consumer spending.
The Importance of the Fed’s Independence
The ability of the Fed to make decisions independently of the president is vital to its effectiveness. The coming court decision about Cook, the possibility of Powell continuing to serve, and the required Senate confirmation of the next Fed chief have garnered attention because they are intertwined with the issue of the Fed’s independence. The threats against Powell have led to a global backlash, and several Republican senators have indicated they would hold up taking action on any Fed chief nomination until any investigation of Powell is resolved.
The Near-Term Outlook
The near-term outlook is benign, with the economy not clearly moving towards large job losses or faster inflation. However, events outside the committee have the potential to shake up the path, particularly if the small risk of Cook being ousted is realized. The baseline expectation is that the Fed will lower interest rates in June and September, and stop cutting with its benchmark rate still around 3%.
Conclusion
In conclusion, the Federal Reserve is facing a critical period, with the investigation into Powell, the effort to fire Cook, and the search for a new Fed chairman all impacting the bank’s independence and effectiveness. The near-term outlook is benign, but events outside the committee have the potential to shake up the path. Ultimately, the ability of the Fed to make decisions independently of the president is vital to its effectiveness, and the coming months will be crucial in determining the bank’s future.
