| This week’s Federal Open Market Committee meeting, which starts Tuesday, had an element of suspense like few others in history. With only hours to go, there was genuine uncertainty over who would vote. This drama was never going to have more than a minimal impact on the outcome — but the longer term implications are profound. Seven Federal Reserve governors have a vote on interest rates, along with five of the eight regional bank presidents, who serve in rotation. Late Monday, the Senate rushed to confirm Stephen Miran’s appointment to fill a vacancy, so he will take part. Meanwhile, the administration tried to persuade an appeals court that it could fire Lisa Cook, a governor whose term has more than a decade to run, in time to prevent her from voting. On Monday night, the court ruled that she could vote. There was never any chance to replace her before the meeting, but the administration evidently cares passionately about each vote. This is not because of the outcome on Wednesday. The Fed will decide whether to cut rates, probably by 25 basis points. It’s possible they will opt for a “jumbo” 50 basis points, but the futures market, as gauged by Bloomberg’s World Interest Rate Probabilities function, gives that only a 5% chance. The big shifts in the odds have come in response to data, which could move the majority of the committee, not the legislative maneuvers around Miran, or the legal proceedings against Cook. Only if there are five FOMC voters (other than Miran and Cook) already prepared to back a jumbo easing could it make a difference. And as central bankers tend to be conservative types (with a small c), they were highly unlikely to be comfortable with a big decision like this being made by a 6-5 vote after the administration had engineered two changes to the committee hours earlier. A jumbo cut might just happen — but subtracting Cook would on balance have made it less likely. A further oddity is that while Cook’s politics are plainly well to the left of President Donald Trump, there’s no direct readthrough to her views on interest rates. She has written extolling the virtues of adding full employment to the Fed’s mandate, which political liberals are often comfortable prioritizing over inflation — that would mean a readiness to make big rate cuts. All of this helps to explain why markets have not so far treated the Miran and Cook issues as terribly relevant; they don’t affect the near-term outcome, while few expect the courts to allow Cook to be fired without a full airing of the charges of mortgage fraud leveled against her. It would be unwise to expect it to stay this way. First, Miran’s arrival, after he insulted the current members by saying they suffer from Tariff Derangement Syndrome, will be provocative to say the least. Last year, he published a paper on the Fed suggesting that the White House appoint the seven governors, while also having the right to dismiss an expanded list of 12 regional presidents at will. In the very short term, he can be expected to dissent in favor of cutting rates by more than the majority on the FOMC decides, and may express himself vocally. The situation grows more charged. But this is only the first step in a five-step plan that would allow the administration to “pack” the FOMC to follow its wishes, without passing legislation through Congress. Will Denyer, chief US economist of Gavekal Research, lays it out as follows: - Get the US Senate to confirm Miran (which has now been done);
- Get a court to uphold the firing of Cook, and do so by February (which could be much tougher, given the Supreme Court went out of its way in an opinion earlier this year to say that the president didn’t have the same freedom to fire Fed officials that he did with other government agencies);
- Get the Senate to confirm Cook’s replacement (which should be easy);
- With Governors Michelle Bowman, Christopher Waller, Miran and Cook’s replacement now forming a majority of the seven Fed governors, get them to block any nominations to the Fed’s eight regional presidencies, which need to be approved by the end of February (this is where the urgency to fire Cook comes from); and
- Get the governors and presidents now on the FOMC to vote as Trump wishes.
It’s fair to say that 4. would follow from 2. The critical steps are to get Cook fired, which will be a fascinating test for the Supreme Court, and then to appoint a new FOMC that will follow Trump’s instructions by making it a priority to minimize the rates the government pays to service its debt. That could be a problem, as attested by the long history of Supreme Court nominees who don’t turn out the way the presidents who nominated them had hoped. These will be intelligent people for whom a seat on the FOMC is the pinnacle of their career. Thus it’s still on balance unlikely that these machinations will end with a Fed prepared to go along with fiscal dominance and financial repression to keep rates low. That’s why the market isn’t too fussed about it. It would change if the Supreme Court decides Cook can be fired. And legal experts think that’s growing more likely. Law professor and Bloomberg Opinion colleague Stephen L. Carter writes: “As recently as last month, I’d have estimated about a 5% chance that the Supreme Court would allow Trump to fire Fed governors; today I’d say the odds are closer to one out of three.” |
