Federal Reserve Chairman Jerome Powell may finally have had enough of the White House’s pressure campaign to have him either slash rates or resign.
For months, Powell has resisted reacting to constant public berating from President Donald Trump, but the final straw may have come last week when White House advisers alleged Powell either lied to Congress about the Fed’s headquarters renovation or grossly mismanaged it. Either of those, if proven true, could give Trump cover to fire Powell “for cause.”
Powell and the Fed are finally fighting back. Over the weekend, the Fed quietly posted a FAQ explaining what happened with the renovation of the Fed’s headquarters, and Powell reportedly has asked the central bank’s inspector general to review its $2.5 billion headquarters renovation project.
A Powell firing could sow doubts over the Fed’s independence and wreck the central bank’s credibility to manage monetary policy unfettered by policy makers.
“Equities would likely sell off on impact, on a risk-off flight to safety trade,” said Padhraic Garvey, regional head of research, Americas, at Dutch bank ING. “After all, this would be an effective forced exit of a reputable Fed Chair by the U.S. president, an unprecedented event for the market to get its head around.
“But thereafter, equities could quickly reassess and choose to rally, on the theory that deep cuts in rates are a boon for corporates, as is a potentially steamy economy,” he said “And inflation is not necessarily a bad thing for equities.”
What happened with the renovation?
The original cost of the renovation of the Fed’s three office buildings overlooking the National Mall in Washington D.C. was estimated at $1.9 billion in 2019 but swelled to $2.5 billion. The more than 33% increase in budget was due to design changes, costs of materials, equipment, and labor and other “unforeseen conditions” like more asbestos than anticipated and toxic contamination in soil, the Fed’s FAQ said.
Last week, Trump’s budget director Russell Vought wrote a letter suggesting Powell either made false statements to Congress about the expensive renovation or failed to comply with permitting rules around capital-area construction. Trump also named three White House advisers to the National Capital Planning Commission, which must sign off on major construction projects in the area.
Vought called out, among other things, luxe VIP dining areas and rooftop terrace gardens.
However, the Fed’s FAQ says “no new VIP dining rooms are being constructed” and “garden terrace” refers to “the ground-level front lawn of 1951 Constitution Avenue, which serves as the roof of the parking structure beneath.” It also noted “Green roofs are found on other federal government buildings, like the Departments of Justice, Interior, and many others, and are encouraged by the General Services Administration.”
Can Powell survive the new attack?
To some, Powell has already done damage, whether he stays on as Fed chair.
“It is easy to argue the market has lost confidence in the Fed,” said Nancy Tengler, chief executive of Laffer Tengler Investments.
She noted some of what she sees as Powell missteps as Fed chair, including raising rates in 2018, which she says caused the “intra-year bear market in response to Trump 1.0 tariffs. He was forced to capitulate months later.”
Then in 2021, the Fed “waited way too long to hike rates as inflation morphed from a controlled burn into a wildfire” that allowed consumer prices to soar to 9.1% by June 2022, Tengler said.
Other economists say if Powell goes, the impact could be limited.
“Basically, it is likely that this would lead to a sizeable initial sell-off that could be calmed by the other governors forcibly reiterating Fed independence,” said Jim Reid, Deutsche Bank’s global head of economics and thematic research.
ING’s Garvey said likely, “an early departure of Powell would be followed quickly by a replacement super-dove as head of the Federal Reserve.” A dove is someone who leans toward keeping interest rates low to grow the economy, compared with a hawk who favors higher interest rates to keep inflation controlled.
But even with a “super-dove” atop the Fed, Garvey questions how much policy would change.
“We can acknowledge that the (Fed’s policy-making arm) would swing more dovish than it has been. But we can’t conclude that the Committee would then cut rates just because Trump commands it. In the end, it’s a majority decision, and the Committee is likely to remain as divided as the latest minutes suggest, but with a bias to keep rates on hold until the coast is clear to cut them.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: Could renovations finally sink Fed chair and stocks? Experts weigh in
