Will Powell Stay or Go?
Wednesday could mark a significant moment for the Federal Reserve. Jerome Powell is set to host his final press conference as chairman, and the Senate Banking Committee is poised to vote on the nomination to replace Kevin Warsh. The Supreme Court is also in session and anticipated to release a decision, particularly regarding the case of Trump vs. Cook, which has been eagerly awaited since January.
Nick Timiraos from the Wall Street Journal, who has a deep understanding of the Fed’s inner workings, discussed Powell’s dilemma over the weekend. Powell suggested in March that a criminal investigation against him was necessary before he would even think about resigning. He has indicated that transparency is key, as he seeks a clear conclusion to the investigation. U.S. Attorney Jeanine Pirro announced recently that her office is halting the investigation but may reopen it later; this could or could not meet Powell’s threshold for clarity. He described this situation as a minimum condition, but not sufficient.
Senator Thom Tillis (R-N.C.), whose banking committee had been stalled due to the investigation, expressed satisfaction with its conclusion. The committee plans to vote Wednesday to advance Warsh’s nomination, paving the way for a final vote before Powell’s term ends on May 15. Warsh is expected to take over as the next Fed chairman.
Powell might not want to discuss the finality of Pirro’s dismissal, but Tillis’s satisfaction could imply that Powell shared similar sentiments privately. A court acquittal or presidential pardon would be necessary for complete closure, but Powell likely doesn’t want to seek that from President Trump. Legal investigations can often leave lingering doubts about their resolution, and a case deemed ‘closed’ can reopen if new evidence arises.
The battle for succession won’t necessarily end with Warsh’s confirmation; it could merely be the start.
It May All Depend on What the Supreme Court Does
Many reporters have framed Powell’s decision as a clear-cut choice, but it’s actually more complex. The Supreme Court’s upcoming ruling on Trump vs. Cook could influence this situation significantly.
The court heard arguments in January and appeared skeptical regarding the administration’s attempt to dismiss Lisa Cook. Judge Kavanaugh cautioned that such a move could jeopardize the Federal Reserve’s independence. Given the thorough nature of the briefings and arguments, the court is expected to rule before the end of its term.
If the court sides with Cook, it would limit the president’s ability to dismiss a governor unless there’s a more substantial cause than the mortgage fraud allegations currently on the table. This could solidify Powell’s position, allowing him to resign comfortably.
On the flip side, if the court grants broad authority to the president concerning definitions of “cause” or limits judicial review, the dynamics could shift dramatically. With Warsh confirmed, Trump would influence appointments to four out of seven board seats, potentially leading to significant changes.
Despite criticisms from Democrats, Warsh, Waller, and Bowman would still be seen as independent thinkers. Additionally, Trump’s appointees would not dominate the 12-member Federal Open Market Committee (FOMC). Powell likely prefers to wait for the court’s decision before finalizing his plans. While the court may not rule by May 15, there’s a good chance that information will emerge on Wednesday.
Game of Monetary Thrones
There are some unconventional possibilities here. Powell might choose to stay until a suitable successor is appointed and confirmed but might condition his resignation on the qualifications of that person. If he announces his retirement, his influence might diminish. Conversely, if he remains, the government would need to select someone trustworthy, or else risk causing unrest in the markets.
This power dynamic could lead to a confrontation that ultimately requires careful deliberation.
If Powell decides to stay, it may also incite Trump to push for his dismissal. Governors can only be removed for “cause,” yet the Federal Reserve Act offers no clear definition of that term or processes for such a removal. Many had expected the court to swiftly reject Trump’s bid to remove Cook, but the absence of a ruling suggests the issue’s complexity is greater than many anticipated.
Should Powell remain and Trump seeks to dismiss him, there’s a risk that this legal battle could worsen the Fed’s independence more than Powell had aimed to prevent. The court might conclude that definitions of “cause” are too vague, allowing presidential actions to go unchecked. In such a scenario, Powell’s intent to protect the institution could inadvertently lead to its undermining. It’s a challenging choice that Powell, with his legal background, must weigh carefully—especially if he steps down quietly.
The Fed is expected to keep interest rates steady around 3.50% to 3.75%. However, the most compelling aspect of Wednesday will likely be Powell’s indication—during his final address—as to what his plans are for the remaining duration of his term and whether the Supreme Court will provide the clarity he needs to make a decision.
