GG: The independence of the Fed is in dispute. He was in Trump’s first presidency. But then Trump was contained. At present, however, Machaca and Advanza … the resignation of Governor Adriana Kugler, two days after the last meeting, which was absent, is a dangerous precedent. The pressure exerted by the entire administration, and the president in person, to impose his views is of an extreme virulence. Kugler preferred to leave in silence. Cook, he didn’t want. And offers resistance.
GG: Bill Ablicte, the head of the Federal Housing Agency, is the one who states that Cook misrepresented personal information by managing a mortgage to achieve its approval in more favorable conditions. From there Trump is taken to talk about a potential crime and behavior of “serious negligence.” The funny thing is that there is no cause initiated against Cook. Much less, an adverse judicial ruling.
Q.: Cook has already rejected the accusations. And he states that he will not leave the position. Is it farewell, with immediate effect, as Trump says? Or still legally in functions? Can you vote, for example, at the September 16 and 17 meeting? Or will it be absent as Kugler did before deciding what he resigned?
GG: Your lawyers will seek a court order to confirm it in their functions. And so you can exercise them without restrictions.
Q.: A precautionary?
GG: Correct.
Q.: We will go to a long judicial battle until the matter is resolved.
GG: Everything suggests yes.
Q.: Can the Fed operate in these conditions, with Damocles’ sword on his head if he does not attend the president’s requests?
GG: It is operating precisely so. The pressure did not start yesterday. What we see, what stands out is only the tip of the iceberg. Is there a history of a similar dismissal? No. President Nixon never reached so much. But if Cook does not give the arm to twist, it will not be removed either. To say different from the president is not a valid reason.
Q.: To what extent can an independent monetary policy be executed in such a suffocating context?
GG: It is not easy. It is not impossible, either. And the quality of your service can be resent. The first thing that will be damaged is credibility. Even in the case in which independence is conserved. The paradox is that for that it does not happen it is likely that politics should be harder.
Q.: However, it is inevitable to think about a scenario of fiscal dominance leading the reins of monetary policy.
GG: The credibility was abolled. Not for anything that has done the Fed. Yes for everything the White House does. Sure. Although if Trump, or the Secretary of the Treasury, Scott Besent, who is the one who understands the most, dictated monetary policy, the loss of rates would have already occurred in May after the day of liberation made the markets staggered. On the other hand, without pretending to make a special concession or reverence to the government, prior to Trump’s assumption, the Fed contemplated a couple of cuts in 2025. That they were not still triggered yet. And we are closer to the end of the year.
Q. Wouldn’t it be logical to wait for the president to deploy all his arsenal of measures before embarking on a decrease in rates like the one Powell hinted at Jackson Hole?
GG: It is not a bad idea. It happens, however, that the labor market gave steep signs of weakening after the July meeting. And it is reasonable to take them into account. Powell already did last year when the unemployment rate shot, enabled the alert light of the Sahm rule, and the Fed lowered the rates to clear the risk of a recession three times.
Q.: How to separate the straw from the wheat? How to cut the rates in September and not seem like an act of subordination to political power?
GG: Suspicions cannot be avoided. The Fed lowered 100 base points last year with the Biden administration. And the long rates did not fall, but went up 120 bps. There there was a third in discord that could work as a referee, to be heard with a strong and independent voice and set limits.
Q.: The so -called “Bond Vigilantes”. In the past, a Fed that deserts its obligations for causing political power would make them paste the cry in the sky. But Trump got Congress to approve a very expansive tax package and the bonds were not altered. His characteristic suspicion made mutis by the forum. Disappeared.
GG: It is where Trump advanced the most. That is the key to fiscal dominance, in my opinion. Bonds, many times, work as a filter and do dirty work before monetary policy take intervention. Without going any further, the bonds, and their debacle, stopped Trump in April and forced him to reverse with the tariff crusade. But they are silent now and look the other way. What happened? Besent changed the treasure financing mix. Deactivated the alarm. What grows is the placement of debt of less than a year. So all the responsibility of containing excesses falls directly to the Fed. The government was able to reactivate its entire toxic agenda. A tax package that increases the deficit, an immigration policy that restricts the job offer, tariffs. And implements it without drama, unlike what we saw in April and May. But for the fiscal scheme to close, the Fed must drastically lower the rates. And that’s what they are.
Q.: The Fed, taking up the pruning of fees in September, does not begin to give in?
GG: Entrincherada cook suggests that it is not so. But credibility will suffer. The Fed has its own reasons to lower rates. Should it overcome independence and not do it? I think no. He will do what the data tells you. The labor report will be more influential than Trump when deciding the loss of rates. But how to distinguish it in September? The two operate today in the same direction.
Q.: Can an independent position be sustained over time? Or is it a battle that Powell plans to give, but has a losing destination written in advance?
GG: This is a situation that flows. After the resignation of Governor Kugler, Trump can place an official in the Fed, Stephen Look. Last year they look expressly criticized the independence of the Central Bank. Let us understand that the Fed depends on Congress, not on the Executive, will the Senate filter pass? It is most likely. If Trump manages to displace Governor Cook, he can put a second official. And if you get it, you can expect other wills to soften. And in May he will say goodbye to Powell. He will choose Chairman, with the Senate agreement. Will dissident governors Waller and Bowman be aligned? Waller can be Powell’s successor and be tempted. It is, by far, the best candidate (what I think he limits his chances). As you can see, the path that leads to the loss of independence is no longer so difficult to imagine. But there will be resistances and frictions. The presidents of the 12 districts, at the head. Although if Trump controls the Board of Governors, he may not renew the mandate.
Q.: They are not appointed by the president, but arise from the nomination in his own districts.
GG: Correct. At the end of the day, the best guarantee of the independence of the Fed is given by the consequences of attacking it. If long bonds regain memory, they can mark a limit. If the shares and the dollar are collapsed by the loss of confidence, too. If inflation and expectations make a leap, the same. If you lower short rates, long rates are triggered, this game is too expensive to insist on it. But if anyone worries, it will not be until the next crisis that we will notice the seriousness of the problem.
Source: Ambito
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