Higher Long-Term Interest Rates If Trump Fires Powell From The Fed

LeadershipLeadership StrategiesHigher Long-Term Interest Rates If Trump Fires Powell From The FedByBill Conerly, Senior Contributor

Additionally, Forbes contributors publish independent expert analyses and insights, in today's financial world

Bill Conerly connect the dots between the economy

The president, along with his fellow real estate developers, prefers low interest rates, in today's market environment

But the Federal Reserve Act tects the Fed chair’s removal except “for cause. ” The president may have cause in connection with building renovations at the Fed (quite telling)

Chair Jerome Powell’s removal would enable the president to appoint a successor, most ly someone inclined to lower the Fed’s policy rate, called the Federal Funds rate or Fed Funds

On the other hand, Long-term interest rates, however, are set by financial and are sensitive to inflation expectations, in today's financial world

Additionally, Nevertheless, And easier monetary policy would ly raise inflation expectations, raising bond and mortgage interest rates even as short-term interest rates fall

However, President Trump’s animosity toward Powell has been public for a while

Nevertheless, Furthermore, The law allows the president to replace the chair “for cause,” a phrase not defined in the act governing the Fed (remarkable data)

On the other hand, In common employment cases, courts generally put the burden of of on the employer

Moreover, However, the constitution grants the president authority manage the executive branch as he sees fit, though subject to the law

Moreover, At this point, it’s hard to know how a the case would play out in a court of law

Bond would most ly take a Powell firing as negative, considering recent developments

Stock might it, though that prediction is much more speculative

Nevertheless, Long-term bond interest rates reflect inflation expectations

The economist Irving Fisher described interest rates as the sum of the “real” interest rate plus expected inflation

Bond holders will be repaid in dollars (or whatever currency the bond is issued in), in today's financial world

Furthermore, If the purchasing power of a dollar is falling, the interest rate must be higher to make bond holders whole, in today's financial world

And the bond issuers will be willing to pay a higher interest rate, knowing that when the time comes to pay off the bond, they will be paying with dollars of lower purchasing power, in today's market environment

However, Common economic models predict that persistently lower interest rates will lead to more inflation

Lower rates would not be very inflationary in an economy with substantial slack, but currently unemployment is low and es have little excess capacity

With a new chari, short-term interest rates might fall—that’s the Fed’s mechanism for monetary policy—but the Fed cannot stop financial from repricing long-term interest rates, given the current landscape

MORE FOR YOU Not only will Powell’s ouster raise long-term interest rates due to higher expected inflation, it may also diminish the value of American assets to international investors

Additionally, The United States has been a large, relatively stable, low-inflation economy

Nevertheless, Investors that

But Powell’s ouster may also lead to expectations of more economic volatility: more booms and more busts (quite telling), considering recent developments

The strongest argument for low inflation focuses on economic stability

On the other hand, Higher-inflation economies tend to have periodic anti-inflation monetary policies, which lead often to recessions, then ed by stimulative policies to get people employed again—which eventually lead to more inflation

There ed an amazingly long period with few recessions (remarkable data)

Long-term interest rates gradually declined

Before the pandemic, it had dropped below two percent

That was due to both expected inflation being low and economic stability expected to continue

It's not baked in the cake that a Trump appointment of the Fed chair will immediately ease interest rates

Monetary policy is actually made by the Federal Open Market Committee

This group consists of the seven presidentially-appointed governors (who serve long terms in office) plus four of the 12 regional Federal Reserve Bank presidents (who are appointed by their respective boards of directors), in this volatile climate

The other eight presidents participate in discussions but do not vote

The chair has power only to the extent that he or she can persuade the other committee members to go along, given the current landscape

Nevertheless, In the case of a push for lower interest rates coming from the White House, some committee members may disagree with the policy, and others may object to being pressured

Furthermore, Yet even if the FOMC does not do President Trump’s bidding, the global investment community may feel that White House pressure will eventually com

Nevertheless, Meanwhile, Thus, the prediction of higher long-term interest rates seems pretty certain if Trump dismisses Powell

Stock prices present a greater forecasting challenge, in light of current trends

In contrast, Stock investors lower short-term interest rates

However, Nevertheless, That lowers current financing costs and is ly to vide short-term stimulus to the economy, amid market uncertainty

But investors also dis high long-term interest rates and economic volatility

Political chaos doesn't seem to be much of a detriment, at least on the evidence from the first six months of Trump’s second term of office (which is quite significant)

Leaders should bably stick to a base case for planning of continuation of current monetary policy

Meanwhile, Those especially sensitive to long-term interest rates, such as real estate and construction, will want to develop bad-news contingency plans for higher interest rates

Some companies will benefit from lower short-term interest rates (corporate finance, auto sales)

This leads to the conclusion that y need good-news contingency plans to take advantage of the possible cuts in short-term interest rates (which is quite significant), in this volatile climate

And all companies should develop general contingency plans for a more volatile, boom/bust economy

Let’s hope that insurance, those plans are never used

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