How Trump’s move against the US Fed boss could backfire
Since Donald Trump took office, efforts to persuade US central bank chairman Jerome Powell to lower interest rates have failed. But like the child who is constantly bullied, Powell has had enough.
Former pacifist turned boxer. Powell is fighting back and the time for the biblical ‘turning the other cheek’ is over.
Trump made many insults last year to pressure Powell and the Federal Reserve to lower interest rates; this includes, but is not limited to, calling him a “stupid human being,” “a complete idiot,” a “foolhead,” and a “stubborn mule.”
But the Department of Justice’s (DOJ) move to issue a subpoena, threatening a criminal indictment regarding Powell’s testimony regarding cost overruns in the Fed’s central office renovations, represents too extreme a mix in Powell’s mind to ignore.
Powell’s term as Fed chairman ends in May, and an agreement has been reached for the Fed chairman to also leave his post as chairman of the central bank’s board of governors. But Powell’s term as Fed governor doesn’t end until 2028, and Trump’s nuclear legal push could give him all the creativity he needs to stay and fight.
In other words, the Justice Department’s move could seriously backfire.
“This new threat is not related to my testimony last June or the renovation of Federal Reserve buildings. The threat of criminal charges is a result of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the president’s preferences,” Powell said in a video announcement.
Powell has the backing of all living former chairs of the Fed as well as a host of former Treasury secretaries who have described Trump’s nuclear baiting of Powell and the Fed as “prosecutorial attacks designed to undermine that independence.”
“This is how monetary policy is implemented in emerging markets with weak institutions, with extremely negative consequences for inflation and the functioning of economies more broadly,” they said in a joint statement.
But what happened next is even more surprising. Markets have been worried for months about Trump’s attempts to interfere with the Fed’s independence to set interest rates. But instead of a meltdown in the stock and money markets, the reaction so far has been positive.
Could this be another TACO (Trump is always afraid) moment? In other words, are markets betting that Trump will inflate an extreme position and eventually back off from it — much like the imposition of massive tariffs last year?
There were many investors caught up in Trump’s partial reversal of tariffs last year. They sold stocks when Trump announced tariffs, but were stuck when the market quickly recovered.
Or could investors be numb to the US president’s many outlandish moves and experiencing Trump fatigue?
The New Year’s hangover is far from over, and Trump has already used the military to attack Venezuela and capture its leader, threatened other countries including Colombia and Cuba, and discussed seizing Greenland.
So geopolitically speaking, heads were already turning about the future of a rules-based order, and then Trump went on to hammer the Federal Reserve this week.
One school of thought says some investors are mulling over a win-win scenario. If Trump loses the fight with the Fed, its independence will be preserved and this will be a net positive for the global market; But if Trump wins and forces interest rates to drop, it will also provide a short-term boost in the stock market.
But attacking the backbone of US institutions like the Federal Reserve has much more serious consequences for US democracy and its key institutional pillars.
Janet Yellen, who chaired the Fed between 2014 and 2018 and was among the signatories of the declaration, summarized the situation by saying that the investigation was the most important attack ever on the independence of the central bank.
“The fact that he is willing to go to such lengths to intimidate a Fed official shows that he will stop at nothing to get what he wants regarding Fed policy,” he said.
“If you can make accusations against your enemies without any reason, we no longer live in a society governed by the rule of law.” “This is the end of Fed independence.”
This is a deeply troubling scenario and one that would undermine the rules-based order of global financial markets. But you can be sure Powell won’t make it easy for Trump.
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