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Can Trump still install a loyalist at the Fed?

Maybe. But he has to choose them a little more carefully.

- May 6, 2019

Last week, President Trump failed again to install a loyalist onto the Federal Reserve’s Board of Governors. Trump wanted economics writer and informal campaign adviser Stephen Moore and pizza magnate-turned-Trump-partisan Herman Cain on the board, expecting them to serve as his eyes and ears on the historically nonpartisan Fed.

But Cain and Moore had skeletons in their closets, and several Senate Republicans warned Trump not to nominate them. Less disqualifying it seems were their crank views about monetary policy, which they recanted or adapted to Trump’s demands for easier money. The Cain and Moore withdrawals follow last year’s more conventional central bank nominees, two of whom Senate Majority Leader Mitch McConnell (R-Ky.) showed little interest in considering.

Observers disagree about why Trump’s nominees failed. But focus on the bigger picture: With his subpar popularity and facing voters next year, Trump will continue to pressure the Fed to keep the economy hot. Like most presidents, he’ll claim credit for economic success and blame the Fed for any failures.

Trump is again criticizing the Fed. That could hurt the U.S.’s credit rating.

Significant headwinds limit Trump’s success. Here’s why.

1. Vetting works, if you let it.

By all accounts, Trump decided he wanted Cain and Moore before the White House had completed background checks on the two men. Not surprisingly, Cain’s well-known allegations of sexual misconduct resurfaced, years after ending his presidential campaign. Moore had a track record of demeaning women, and owed back taxes and alimony. Even today, we still don’t know whether the FBI had completed its background checks or what else the agency might have found.

What’s more, the White House ignored the “advice” directive of “advice and consent,” failing to take the Senate’s temperature before Trump revealed his Fed picks.

Far more disciplined past presidents and their advisers vetted first and nominated next, seeking senatorial advice along the way. And to good effect. As Heather Ba and Terry Sullivan reported here at TMC, even before Moore pulled out, Trump had withdrawn a record 40 intended or forwarded nominations, far outpacing those withdrawn over a comparable period by Barack Obama and George W. Bush.

2. Choose your loyalists carefully

Would the Senate confirm a baggage-free Trump loyalist? Some suggest not, arguing that Moore and Cain’s defeats show that GOP senators will protect the central bank from partisan interference. Maybe, but we count only Sen. Mitt Romney (R-Utah) on record saying so.

Others didn’t seem to care that Trump selected Moore after seeing his Wall Street Journal op-ed that echoed Trump’s persistent attacks on Fed chair Jerome Powell. In fact, Sen. Ben Sasse (R-Neb.) suggested that senators should welcome Moore’s economic thinking, saying that Moore’s nomination “has thrown the card-carrying members of the Beltway establishment into a tizzy” for challenging monetary policy orthodoxy.

Moore’s misogynistic record likely did him in. With a slim GOP majority and no Democratic support, four senators can knock out their own party’s nominee. At least four of the eight Senate GOP women aired reservations. Others surely preferred to avoid accusations of waging a “war on women” just to get Trump’s picks confirmed for the low-profile, sixth and seventh seats on the Fed’s Board of Governors.

Still, the resistance to Moore and Cain tells us little about how this Senate will react to Trump’s next nominees if they’re chosen simply to lobby for interest rate cuts.

The Fed’s next big appointment will probably be a white man. Here’s why it struggles to diversify its leadership.

3. Jawboning the Fed has limits

Trump is not the first president to try to politicize the Fed. Lyndon Johnson leaned on Fed chair William McChesney Martin to keep interest rates low during the Vietnam War. Richard Nixon pushed Arthur Burns to juice the economy in the run-up to the 1972 election. Even Bill Clinton wooed Fed chair Alan Greenspan by giving him a prominent seat beside first lady Hillary Clinton during Clinton’s first address to Congress. In almost all cases, presidents push back against higher rates, preferring that central bankers keep their feet on the gas.

Even with a strong economy, Trump faces stiffer headwinds than most, even from his own party.

First, he uses high stock prices as his own presidential approval rating — tweeting about each new record and blaming the Fed for equity sell-offs. But the Fed’s dual mandate from Congress requires that policy makers stay focused on keeping employment strong and prices stable, not on bolstering the stock market.

Second, Trump’s demand for rate cuts, amid a growing economy and unemployment at half-century lows, contradicts Republican monetary orthodoxy. Trump needs easy-money doves, but conservative senators (and the bankers who support them) historically prefer tight-money hawks. Even Vice President Pence, who in the past has held traditional GOP attitudes toward tighter money, recently began calling for rate cuts. Only a few Hill colleagues have joined that chorus.

Third, the Fed fought back, supported by its bosses in Congress. Less than a year after appointing Powell, Trump wanted to fire him but was stopped by the law that established the Fed. Trump’s 2018 call for the Fed to stop hiking rates might have initially encouraged the Fed to keep tightening to show its independence. Ultimately, amid Trump’s relentless attacks and a stock market collapse, the Fed paused early this year. Powell’s record number of visits to Capitol Hill could be keeping lawmakers on his side and the president at bay. Americans have more confidence in the Fed’s handling of the economy than they do the president’s, which surely dissuades lawmakers from abandoning Powell.

Trump’s approval is far lower than past presidents’ in similarly robust economies. He’s running out of options if he wants to supercharge the economy in time for the 2020 election. Easy money is an easy target.

Mark Spindel is founder and chief investment officer at Potomac River Capital, a Washington-based investment firm.

Sarah Binder and Spindel are co-authors of the award-winning “The Myth of Independence: How Congress Governs the Federal Reserve” (Princeton University Press, 2017).