Years ago, legendary stock market strategist Marty Zweig made a comment that has become axiomatic on Wall Street – “Don’t fight the Fed.” His advice was simple and to the point. Essentially, it meant that the U.S. Federal Reserve’s monetary policy determined the fate of financial assets. The crucial factor was the ebb and flow of liquidity. Reducing the central bank’s benchmark lending rates was bullish for stocks and increasing them bearish. Zweig believed that successful investing did not require heavy economic analysis, because forecasters utilizing deep-dive fundamental research tended to get things wrong. He focused on the Fed, market technicals, and investor psychology – ignoring groupthink. History has proven that Zweig was correct. Remember – the level of interest rates directs the allocation of capital – another cardinal rule.
Trump vs. Powell: A Modern-Day Battle for Control
We wonder what Zweig would be thinking today, given the unrelenting criticism that the While House is dishing out to Fed Chair Jay Powell. Hollywood would have trouble creating such a script. Last week, President Trump took the proverbial “fight” to the Fed, when he inspected the headquarter’s renovation project. The President is adamant that the Fed-funds rate be cut. Powell is determined to maintain his institution’s independence from political control, preferring to wait for additional data before deciding the next course of action. This week’s meeting of the Federal Open Market Committee should be a doozy, but the odds favor Powell standing pat. We could go on and on about this being the appropriate action: the U.S. economy seems healthy, stock indices are at record highs, private equity is being peddled on Main Street, crypto – not cash – is king, and liquidity is plentiful. Furthermore, no one can be certain how tariffs will impact the path of inflation.
Getting back to Zweig, our sense is that he would be a wary bull, nervous about the speculative atmosphere and pricey valuation. Since the Fed has already begun an easing cycle, this would override his overall skittishness. Powell’s Fed has slashed rates three times since September 2024 and is merely taking a pause. Wall Street expects the next cut will occur in September. Ironically, a stock market correction this summer might speed things up, providing the impetus to ease without sacrificing the appearance of independence.
A Historical Look at Presidential Tensions with the Fed
While all President’s desire lower interest rates, keeping disagreements over monetary issues private has been the norm. This is not to imply that tension never existed. For example, George H.W. Bush held a grudge against Alan Greenspan, believing that tight money cost him the 1992 election. Following the wise counsel of his Treasury Secretary Bob Rubin, Bill Clinton befriended Greenspan by pledging fiscal responsibly, often sounding more like an Eisenhower Republican than an FDR New Dealer. His administration’s financial savvy produced a budget surplus and an ideal climate for U.S. stocks, bonds, and the currency.
Trump’s public flogging of the Fed Chair is a historical first and shocking in its intensity, but harsh criticism is definitely not. Mariner Eccles who ran the central bank from 1936 to1948 was accused of being a “Socialist” during Senate testimony. His relationship with Harry Truman became increasingly strained. Truman persuaded Eccles to continue the U.S.’s emergency policy of anchoring long-term Treasury yields begun during World War II. This left him with the false impression that Eccles could be manipulated. They battled behind the scenes over inflation objectives and Eccles refused to adjust policy to suit the President.
Famous Fed Confrontations
The two most well-known confrontations occurred during the Johnson and Nixon administrations. William McChesney Martin served as Fed Chair from 1951 to 1970. He is remembered for his observation that the Fed’s job was “being a chaperone who has ordered the punch bowl removed when the party was really warming up.” In November 1965, Martin was concerned that the Vietnam War and LBJ’s Great Society program would ignite inflation, and the Fed boosted rates. LBJ was furious and Martin was ordered to meet with the President at his Texas ranch. It has been reported that LBJ shoved Martin against a wall and screamed: “My boys are dying in Vietnam, and you won’t print the money I need!”
Finally, the most infamous Presidential interference occurred between Richard Nixon and Arthur Burns, who chaired the Fed from1970 to 1978. Tricky Dicky believed that Martin’s restrictive policy caused his loss to Kennedy in 1960. When Martin retired during Nixon’s first-term, long-time Nixon’s friend Burns got the top job at the Fed with the expectation that an expansionary monetary policy be would be pursued, regardless of the circumstances. Nixon pressured Burns to juice the economy – despite bubbling inflation. This was especially true in the run up to the 1972 election. Nasty conversations between the two in the Oval Office were tape recorded. Nixon’s harangues became public following the Watergate investigations. The White House even went so far as to plant rumors such as Burns demanding a big salary increase. Burns ultimately capitulated, cutting the discount rate in late 1971. This failure to resist political heat is blamed for the subsequent secular era of runaway inflation and rotten investment returns. Things got so terrible that Carter and Reagan had to endure the tough monetary cure initiated by Paul Volcker, the “GOAT” of all Fed chiefs. Americans can thank these Presidents for quietly tolerating such powerful medicine and enduring poor approval ratings. In Carter’s case, it may have cost him a second term. Reagan benefitted enormously once inflation had been corralled, becoming one of the U.S.’s most beloved leaders.
Navigating Policy Amid Political Pressure
History shows that the record of the Federal Reserve is far from perfect – witness the consistent cycle of booms and busts. A central banker’s primary task is to avoid economic and financial accidents. Again, the box score here has not always been stellar. Nevertheless, the vast majority of U.S. Fed Chairs have been honorable, intelligent public servants. We cannot imagine a tougher task than regulating the chaotic behavior of human beings, particularly as it relates to money and markets. Jay Powell is a classic public servant, who clearly fits into the honorable and intelligent category. Do not be confused by his mild-mannered nature. As the old saying goes, names will never hurt him. Like all Presidents, you cannot blame Trump for craving lower interest rates. However, the record is clear that Powell’s worst possible response would be to yield to the intense Presidential pressure. Look what followed Johnson and Nixon. If tariffs do, in fact, produce inflation, a replay of the tumultuous 1970s becomes a probability. In that instance, Powell will be ridiculed as a goat.
