MNI INTERVIEW: Early 26 Powell Exit 'Right Compromise'-Bullard

President Donald Trump’s repeated threats to remove Jerome Powell before the end of his term risk unnecessarily driving up long-term borrowing rates, but it would be a reasonable compromise for Congress to allow a new Fed chair to take office early next year, former St. Louis Fed President James Bullard told MNI. 

"Some damage has been done" by the barrage of comments over firing Powell, Bullard said in an interview, in which he added that the FOMC should lay the groundwork for a September rate cut at next week's meeting as it is becoming clear that the inflation risks from tariffs have diminished. 

"To the extent this episode is calling into question whether the administration or the U.S. generally would be more tolerant of inflation going forward, then that’s going to seep into the pricing of all kinds of assets, and you’ll have an inflation risk premium you’ll have to contend with, and generally speaking interest rates would be higher than otherwise," he said. 

"Traditionally, macro economists would view that as totally unnecessary." 

NOT QUITE INDEPENDENT

While monetary policy is not independent of politics, "it's arm’s length from the day-to-day give-and-take in the political world,” Bullard said.

Any new president gets to put his stamp on monetary policy by naming a new Fed leader – but not immediately – while other members of the Board of Governors have staggered 14-year terms. Regional Fed presidents are chosen by their local private-sector boards of directors and approved by the Fed Board in Washington. 

"It’s all a little bit off-center by design," Bullard said. "You want a smooth transition between administrations so you don’t push monetary policy too quickly in one direction or another based on political factors." (See: MNI INTERVIEW: FOMC To Go Own Way If Chair Lacks Credibility)

Fed chairs and vice chairs have four-year terms, and Trump's choice for the top role would normally take office a year into his term, but that date has slipped to May over the years due to nomination and confirmation delays – something Congress could fix with legislation, Bullard said. 

"It would be the right compromise on this. People do feel like any president should get to name the person and policy they think is best,” he said, adding he considers all of Powell’s likely replacements to be credible candidates.

LOWER RATES SOONER

September would be a good time to resume the Fed's interest rate normalization campaign, with a second cut in December if the economy stays resilient, Bullard said. 

"The committee should go ahead and tee up a September rate cut at the July meeting," he said. "They don’t have to be this far above neutral to get the remaining amount of inflation to dissipate over the next year, so they can gradually reduce the policy rate to the neutral rate." 

The FOMC's current policy rate of 4.25%-4.5% is more than a point above its median estimate of neutral at 3.0%. Bullard's own estimate of the neutral rate is between 3.25%-3.5%. 

Global growth is slower than it otherwise would be with a material hike in U.S. tariff rates, but there's not too much impact on inflation outcomes, Bullard said. 

"Profitability seems to have been maintained by many companies, meaning they’ve found ways so far to get around the tariffs," he said. "Price effects will be muted and spread out along the supply chain, so I just don’t think we’re going to get a lot of action out of trade." (See: MNI INTERVIEW: Fed Seen Cutting Twice This Year - English)