What Congress Should Have Asked Powell

By Brad Thomas, Editor, Wide Moat Daily

The drama between President Trump and his Fed Chair, Jerome Powell, continues. And at this point, it feels pretty familiar.

The disagreements began fairly quickly after Trump nominated Powell to that position on November 2, 2017. But by March 2019, he was telling Fox Business that Powell had diminished U.S. GDP.

The Federal Reserve, you see, had raised rates four times in 2018.

The economy was strong, and unemployment was nearing record lows. So, the central bank started to "take away the punch bowl," in the words of former Fed Chair William McChesney Martin.

Trump absolutely hated the idea. The market wasn't happy either.

The so-called "taper tantrum" propelled the S&P 500 lower. By Christmas Eve of 2018, the index had fallen about 20% from the high of that year.

Then, of course, Powell was caught flat-footed when inflation (which was supposed to be "transitory") rose uncomfortably high starting in 2021. The Fed hiked aggressively through 2022, leading to a bruising year for investors.

I won't debate the wisdom or foolishness of those sagas. I'll only say it's not unusual for the Fed and the president to clash – especially the Trump/Powell duo.

As I wrote earlier this month, that relationship doesn't appear to have gotten any better. And now, the Fed critics have found some new ammunition.

The Cost of a Leaky Fed Roof

Late last month, Congress pressed Powell for justification on his ongoing renovations to the Fed's D.C. headquarters. Renovations that are costing $2.5 billion.

According to the National Capital Planning Commission, the project is meant "to renovate and expand" the Fed's Marriner S. Eccles and Federal Reserve Board-East buildings:

... to address a critical backlog of upgrades; respond to changes in building codes and regulatory requirements, accommodate information technology requirements, building security provisions, advancements in environmental awareness and energy efficiency; and address increased utility demands and associated requirements imposed by an increased building population.

Back in 2019, when the project was first proposed, it came with a $1.9 billion price tag. For those who don't know much about commercial real estate, that might sound reasonable enough for altering two buildings built so many decades ago – especially in an overpriced city like D.C.

And with inflation being as bad as it's been (setting aside who helped encourage that inflation), it might seem as if the additional $0.6 billion it's costing could be justified as well.

That is until you hear how, according to The New York Post, this revamp includes:

... rooftop garden terraces, skylights, ornate water features, and a new elevator system that allows board members to be dropped off directly in their VIP dining suite.

Planning documents... [show] both buildings will use Georgian white marble and "create a place where the interchange among citizens would be advanced within the framework of the republic's institutions."

Powell was pressed on this "Palace of Versailles" during testimony before the Senate Banking Committee last week.

Naturally, Powell danced.

The allegations, he explained, "are misleading and inaccurate in many, many respects."

According to him, "There's no new VIP dining. There's no new marble. There are no special elevators. There are no new water features. There's no beehives. And there's no roof terrace gardens."

Moreover, he says, critics aren't taking into account how badly the Eccles building, in particular, "really [needs] a serious renovation." As-is, it's "not really safe" or even "waterproof."

Yet the upgrade plans themselves apparently contradict his denials. In which case, Powell directly lied to Congress. Or he's much more incompetent than he should be.

In the grand scheme, this drama (and that's really what it is) probably doesn't matter.

After all, if you wanted to pick on the Fed, I could think of better critiques...

A Lot of Wrong in One Chart

Stephen Hester – chief analyst with two of our premium research services – shared this chart in the most recent edition of High-Yield Advisor:

Those dashed grey lines represent the Fed's opinion on the likely direction of interest rates at the time. The solid blue line is where interest rates actually went. And as Stephen points out, the Fed has been consistently wrong about the direction of rates going on 25 years.

As Stephen put it, that's a lot of wrong in one chart...

If you wanted to ding the Fed on something, I'd start there.

Or maybe you could hit Powell with the fact that he dragged his feet dealing with inflation – contributing to one of the worst cost-of-living crises in living memory.

Or you could point out how, under Jerome Powell, the Fed ran an operating loss of $114.6 billion in 2023. That was its first time in the red. Ever.

Or – and Trump appears to have latched on to this – you could just say that the Fed has held steady even as inflation has come down and other central banks have begun cutting.

Like I said, there's plenty of ammunition.

I think the president knows that. And it's why the writing is on the wall for Jerome Powell.

The Question That Matters: Who Replaces Powell?

There has been chatter about "investigating" Powell.

Federal Housing Finance Agency Director Bill Pulte had a few things to say:

I am asking Congress to investigate Chairman Jerome Powell, his political bias, and his deceptive Senate testimony, which is enough to be removed "for cause." Jerome Powell's $2.5B Building Renovation Scandal stinks to high heaven, and he lied when asked about the specifics before Congress. This is nothing short of malfeasance and is worthy of "for cause."

The inclusion of "for cause" is important. That's because removing a Fed Chair is hard... very hard. They can't be fired at the whim of the president. They can only be removed "for cause," something that's never actually happened.

I doubt it will happen this time.

More than likely, Trump will wait Powell out. His term as Fed chair ends in May of next year. And it's pretty much a given that Trump will appoint somebody else when that time rolls around.

Who it will be is anybody's guess. The president has already said he has "two or three choices."

Sometimes, good investing means just waiting and seeing...

So, we'll wait. And we'll see.

Regards,

Brad Thomas
Editor, Wide Moat Daily