The courts have ruled that Trump can’t fire Powell just because he doesn’t like Powell’s monetary policy. He would need cause to do so.
The Office of Management and Budget may have given him a reason that would pass legal muster.
However, it’s not because of the Fed’s current $1 trillion unrealized losses…
You see, in normal times, the Federal Reserve bank earns a positive return on the assets on its balance sheet.
After paying its army of economics PhD’s and the power bills at its various branches, the Fed has historically given those profits to the U.S. Treasury.
In case you hadn’t noticed, these are not normal times.
The central bank is operating at a loss, because it’s following the same business model that led to the collapse of Silicon Valley Bank: A mismanagement between its holdings and today’s interest rates.
The mismatch is largely the Fed’s fault, following its aggressive interest rate hikes starting in 2022.
On paper, the Fed has unrealized losses of over $1 trillion. Unlike a publicly-traded company, however, the Fed doesn’t have to report earnings or mark to market. They can hold losses theoretically indefinitely. But it’s not a good look for fiscal management of the nation’s monetary policy.
Today, we’re 10 months into the Fed’s rate cut cycle. After rapidly lowering rates by 1%, interest rates are … higher.
As of yesterday’s close, the 30-year Treasury bond is at 5.016%.
Interest rates are higher over the past year, even as the Fed has lowered rates a full point.
Last September, when the Fed had interest rates one full percent higher, the 30-year yielded just under 4%.
That’s not supposed to happen.
Interest, Inflation, and Dueling Goals
In the meantime, the Fed isn’t lowering rates, and rate cut predictions keep getting pushed out.
Jerome Powell continues to obstinately hold rates steady – and he’s not alone. While he’s the Chairman of the Fed, decisions are still made by the entire committee.
Yesterday’s inflation data didn’t help. On a headline basis, inflation rose from 2.6% to 2.7% on an annualized basis.
Some see it as inflationary effects of tariffs kicking in. Others see it as statistical noise, noting that most of the recent inflation has come from relentlessly higher housing costs.
Even JPMorgan Bank CEO Jamie Dimon sees the possibility of the Fed having to raise interest rates as its next move, especially if inflation ticks higher in the months ahead.
Meanwhile, President Trump wants to see more aggressive rate cuts as the U.S. lags other central banks in rate cuts.
Between now and the end of 2026, roughly half of America’s debt is rolling over at higher rates. Materially lower rates could save billions, if not trillions over time. It’s a valid concern, but could risk sending a reasonable economy into inflationary overdrive.
Who will win among these dueling goals?
The OMB Drops a Possible Trump Card
As Fed Chair, Powell has been overseeing the renovation of the Federal Reserve’s headquarters in Washington D.C. The Marriner Eccles Building was completed in 1937, and is showing some age at 88.
It’s a massive project, valued at $2.5 billion. And Powell is being accused of mismanaging the project and cost overruns. That has the OMB raising the alarm – and giving Trump cause to fire Powell.
It’s hard to think of something that would offend President Trump more than coming in late and over budget on a real estate project. And this mismanagement could theoretically give the President legal cause to let Powell go.
While that scenario seems unlikely, American politics has been an endless string of unlikely scenarios.
The rhetoric heats up against JPow keeping his job
It’s not the trillion-dollar paper loss the Fed is currently sitting on that may get Powell out of office before his term expires next spring. That’s business as usual.
Instead, it’s a problem that’s less than 3% of the Fed’s massive losses with no real plan to address its balance sheet.
But the larger problem remains: Powell is a figurehead. He’s a voice in a chorus. An important one, yes. But you’d need to replace more than Powell to get a Federal Reserve ready to follow Trump’s suggestions.
Step Back From the Economic Drama
The truth of the matter is, the Fed’s ability to pump money into the economy just prevents healthy corrections from occurring.
The central bank, which was created to stabilize prices, led a century of consistently unstable prices and the long-term destruction of the dollar.
The purchasing power of $1 when the Fed was created in 1913 buys less than two cents today. Sure, we have better and more fun technologies.
But, following the dollar’s final decoupling from gold in 1971, the U.S. economy shifted from an economy that provided a strong middle class with wage growth to one focused on asset price appreciation.
Great news for the investor class, bad news for everyday Americans who have to work harder each year just to stay in place. The fact that nobody at the Fed has been fired for crushing the middle class with decades of monetary financial repression is the real tragedy.
If you haven’t had a 25% increase in your wages since 2020, the cumulative inflation of the past five years, you’re worse off today. But even if you fire the current guy, the next head of the Fed will be just as bad.
The Fed needs to end. It’s lasted over a century and there’s more than sufficient data to show how destructive its policies have been.
For a country that talks up free markets, the lack of a free market for interest rates, the cost of borrowing money, has been one of the most destructive policies, slowly at first, but not accelerating.
~ Andrew
P.S. Since its inception, the Federal Reserve has been anything but. Despite the dotgov website and Senate-approved appointments, the bank has always claimed to be a private institution.
And just as it isn’t Federal, its reserves are suspect. The gold in its New York vaults were acquired from the American people as FDR threw the people off the gold standard.
The Fed’s paper assets are just that – and if they get to be too troublesome, they can be papered over with newly-created money. Nice work if you can get it.
So as the Fed’s challenges continue to put the economy in a rough spot, and as Powell and Trump have an Apprentice-style clash of personalities, gold can still be a winner here.
What was once money may not become official government money again, but it’s certainly held its own – and will likely continue to rise amid further drama.
There’s still a lot more to come in commodities, and our Grey Swan members will continue to get critical updates.
Your thoughts? Please send them here: addison@greyswanfraternity.com
