Could the Fed Fire President Trump?

“You know, Mr. Chairman,” says the caption on a cartoon of the Federal Reserve, “he can’t fire you but you could fire him.” The cartoon appears in the latest number of Grant’s Interest Rate Observer. It, and the lead article in Grant’s, illuminate what is, by our lights, the most important story of the year — that the future of the Trump presidency may be hostage less to Speaker Pelosi & Co. than to Chairman Powell and the blasted bond market.

What seems to have ignited Grant’s on this particular fortnight is an astonishing spike, back in September, in the overnight “repo” rate under which the Fed lends overnight to commercial banks. Grant’s quotes what it calls a “must read” column by Karen Petrou in the Financial Times. Ms. Petrou reckons that by the end of January the Fed is likely to have committed $11.5 trillion in “gross cumulative support” to the market in these repo loans.

Grant’s has been banging this drum — prophetically — for years now. In 2003, as the decline of the dollar was gathering speed, it reminded its readers of why the Fed was established. It quoted the central bank’s very enabling legislation as listing the purposes as furnishing an “elastic currency,” affording “means of discounting commercial paper,” establishing “a more effective supervision” of American banking, and — wait for it — “other purposes.”

That gave way to the greatest case of mission creep since the Cro Magnon era. An institution originally envisioned as an agent to lubricate commerce by enlarging the market in commercial paper, bills of exchange, and private IOUs is suddenly in the business of the constant accommodation of a federal debt as would have floored the Founders, who were wracked with embarrassment at having defaulted on the paper continental dollars with which they financed our Revolution.

Ms. Petrou reckons that the Fed has so increased its support for these overnight loans and, she adds, even longer-term deals that the “best explanation” for the “insouciance” with which it is all greeted is “de facto nationalization of the market.” And, we’d add, under a Republican president who, in Mr. Trump, ran for office by proclaiming on the hustings that the Federal Reserve, with its quantitative easing, had created a “false economy.”

Not that we assign President Trump the bulk of the blame for all this, even if he’s abetted the problem by jawboning the Fed for lower interest rates. He, as Amity Shlaes reminded readers of the New York Times the other day, didn’t invent the presidential practice of plumping for low interest rates from the Fed. She recounted Nixon’s humiliation of Arthur Burns in the seasons leading up to the abandonment of Bretton Woods.

Plus, there’s the fact that 100% of the monetary powers that the Constitution delegates to our government are delegated to Congress. The retirement of one great House Republican after another suggests that the party nurses little hope of regaining control a year hence. Yet we’d like to think it could be done were a next-generation Newt Gingrich to come up with a new Contract With America based on the monetary crisis, as Mr. Trump ponders Grant’s cartoon.

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Image: Drawing by Hank Blaustein, courtesy Grant’s Interest Rate Observer.