When Alan Greenspan left the US Federal Reserve in 2006 after nearly two decades as its chairman, he was given his actual chair from the central bank’s boardroom to take home as a retirement gift. The current chairman, Jerome Powell, whose term is up in May, may be handed criminal charges instead.
In a video statement released on Sunday, Mr Powell said the US Department of Justice is investigating him over testimony he gave to a Senate committee about renovations to the Fed’s headquarters. It is the first time a US central bank chair has faced such proceedings.
The Fed is critical not just to the American economy, but the global one, too. Allegations of criminality among its governors spell bad news for the global markets. When there are claims that such allegations are politically motivated, the damage could be worse.
In Mr Powell’s case, there are a number of worrying signs. President Donald Trump has been mounting a pressure campaign against him for months over his failure, in the President’s view, to cut interest rates quickly and deeply enough. Mr Trump argues that low rates will buoy the housing market and encourage growth. His opponents say the inflationary consequences would be dire.
The Fed's rate-setting committee, led by Mr Powell, has been split on the issue. Worryingly for a famously technocratic organisation, the division appears to be political; the biggest supporter of large rate cuts is Stephen Miran, the only governor appointed by Mr Trump in his second term.
This has made the benefits to Mr Trump of seeding the bank with loyalists clear. Fed governor Lisa Cook is currently being prosecuted by the DOJ for an alleged instance of mortgage fraud that reportedly took place when she was a private citizen. The White House is attempting to use the allegation as cause to remove her from her position – the first time a governor would ever have been terminated for cause – though she has remained in office pending a hearing at the Supreme Court.
Mr Powell’s potential prosecution is even more significant. The fact that he is due to leave office in a few months anyway has left Mr Trump's critics saying the motivation may be less about removing him and more about sending a message to his successor.
The irony is that Mr Powell’s reluctance to lower rates with too much alacrity is a consequence of America’s upbeat economy. His video statement has not yet affected the markets in any major way – nor has the ongoing saga with Ms Cook. Thus far, it seems, few believe the President would have the time or attention to follow through on his threats. Cool headedness, goes the thinking, will prevail.
Sadly, Mr Trump seems determined to prove this wrong, and the economic sluggishness he fears may manifest as a result. While short-term signals read OK, long-term faith in the American economy could be tested, as evidenced by a relative slump in the value of the dollar, high 30-year treasury bond yields and the soaring price of gold (an alternative store of value to central bank-backed currency). There are fears that a Federal Reserve remade into another machine of politics, changing rates on partisan whims, will worsen the problem.
John Kenneth Galbraith, one of the great American economists of the previous century, once argued that “in economics, it is a far, far wiser thing to be right than to be consistent”. America should try to avoid having a central bank that is deemed to be neither.
