Can Trump fire Powell?

April was Financial Literacy Month and to celebrate, I am answering some of your questions.

Q: Can President Donald Trump Fire Federal Reserve Chair Jerome Powell?

The Federal Reserve was created by Congress in 1913 to make the American banking system more stable. Banking panics had occurred often throughout the 19th century and establishment of an independent federal central bank was a way to reduce those events in frequency and impact.

Unlike many other agencies, the Fed's independence was seen as vital. Congress understood that the nation's central bank must be shielded from political pressure so that it could steer the economy without fear of retribution. Given the Fed's unique independence, the bar is high for the president to fire Fed officials.

FDR tested this concept and lost. According to a 1935 Supreme Court ruling, Fed officials can only be forced out or fired "for cause," which most have interpreted as some sort of crime, like embezzlement.

For his part, Powell has been steadfast in his assertion that presidents may not legally fire or demote the Fed chair and he would not step down, if asked to do so.

Q: Bonds have made headlines. Please explain how they work?

Buying a bond is essentially the process of making a loan to an entity, whether that's a government, a state, a municipality, or a company. The loan is established for a predetermined period (the "term"), at a fixed rate of interest (the "coupon").

Borrowers are on the hook for interest payments, either at periodic intervals (usually every six months), or at the end of the agreement, when they repay the obligation in full. The higher the risk that the borrowing entity will not repay the bond, the more interest that the bond buyer will demand.

If you want to sell a bond before it matures, you may find that the price has changed. For example, let's assume you purchased a 10-year U.S. government bond in early 2022 for $100 and the interest rate was 2%. Flash forward three years, when new 10-year bonds are paying 4.3%, and you can see how your bond is not worth as much.

Who would buy your 2% bond when they could earn more than 4%?

If you wanted to sell your existing bond in the market, you would have to drop the price to induce someone to buy your existing bonds. That's why it is said that bond prices move in the opposite direction of prevailing interest rates.

Q: How can I explain compounding to my kids?

Use this example: If you deposit $100 in the bank and the bank pays interest of 5% annually, at the end of the first year, you will have $105 in the account. If you keep your money in the account for another year, you earn another interest payment on both the original $100 and the $5 your money has earned.

At the end of two years my money will grow to $110.25. Time can super charge how much your money can grow, but compounding works against you when it comes to debt. That's why high interest debt that is assessed on credit card balances can be so pernicious.

Q: Given the big cuts to government programs, I'm worried about Social Security. Should I be?

The Trump Administration has repeatedly said that it would not make cuts to Social Security (or Medicare, for that matter). The reason seems pretty clear: Tens of millions of Americans rely on the program.

The Trump Administration understands that a lot of those Social Security recipients vote, so it is unlikely to touch benefits.