Trump’s attack on Fed could speed up investment pivot
Donald Trump’s escalating siege on Federal Reserve chairman Jerome Powell will be closely watched by Australian fund managers as markets move forward with the latest attack on the US central bank’s independence.
The US president’s attempts to pressure the Fed to cut interest rates led to an unprecedented intervention by 12 international central bankers, including Mr Powell and the Reserve Bank of Australia governor Michele Bullock, who issued a statement in solidarity with the Fed.
RBA veteran Jonathan Kearns, now chief economist at annuity giant Challenger, said it was a historically unusual move by central bankers who tend to stay away from politics.
“The independence of central banks is the cornerstone of price, financial and economic stability in the interests of the citizens we serve,” said the statement, which was also signed by Andrew Bailey, governor of the Bank of England, and Christine Lagarde of the European Central Bank. The statement was included.
The subdued reaction from stock and bond traders is not surprising.
Other than a bond market meltdown following the deregulation day tariff shock last April, markets have mostly ignored developments from the White House.
Ms Bullock warned that low risk premiums, despite growing geopolitical instability and the threat of tariffs, meant a worse-than-expected outcome could catch traders off guard and end in tears.
Dr Kearns doubted Mr Trump would pay much attention to central bankers’ statements, but he may have to rein in his attack if the bond market reacts harshly to the prospect of the Fed becoming politicized and inflation higher over the longer term.
“Many analysts believe the risks are greater than what has been priced into the bond market,” he told AAP.
“If you see a bigger reaction from the bond market, then maybe you could experience some sort of pullback like you saw after liberation day.”
JP Morgan CEO Jamie Dimon, one of the most influential voices on Wall Street, said that reducing interest rates by reducing the Fed’s independence would lead to adverse consequences by raising inflation expectations and interest rates over time.
Super funds have more than $600 billion tied up in US assets, according to the IFM Investors and Super Members Council, and are increasingly turning to the US to park their funds as they outgrow the Australian market.
Dr Kearns said Australian fund managers needed to change the way they perceived the risks of US investments, given the risk of higher inflation.
But there’s also a risk of overreacting and missing out on the AI blessings that are giving U.S. stocks a boost.
“We’ve seen investors do this: ‘I can’t completely reduce my exposure to the United States, but I’ll adjust it marginally,'” he said.
“We have heard statements from some super funds saying they are directing a larger share of their flows to other markets rather than the US because of their assessment of the prospects and risks.”
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