Trump's Assault on the Federal Reserve: A Destructive Game of Chicken

Strategic Insights -

As the standoff between US President Donald Trump and Federal Reserve Chair Jay Powell continues, investors are left to wonder what the long-term consequences will be if Trump's pressure on the Fed ultimately leads to Powell's ouster. Trump's distrust of the Fed and his desire to see lower interest rates have been clear for some time, and his recent comments have sparked a market reaction that suggests investors are not willing to stand idly by while the president continues to undermine the independence of the central bank. The bond market, in particular, has been a crucial factor in holding Trump back from making a move that could have far-reaching consequences for the global economy.

Key Takeaways:

  • The Fed has maintained interest rates at over 4.25% all year, despite Trump's desire to see them at 1%, a rate typically seen only in times of crisis.
  • Trump's attacks on Powell are not just a personal vendetta, but a calculated attempt to exert pressure on the Fed to lower interest rates and stimulate the economy through more aggressive monetary policy.
  • The bond market has been a key factor in holding Trump back, with investors shunning riskier assets and pushing up long-term borrowing costs in response to his attacks on the Fed.
  • If Trump were to follow through on firing Powell, the dollar would likely take a hit, with investors losing confidence in the US economy and the global financial system.
  • The impact would not be limited to the US, with emerging markets and other countries that rely heavily on the dollar also feeling the effects of a decline in confidence in the US economy.
  • Powell's successor would have significant influence on the Fed's policies, including interest rates, the balance sheet, and emergency swap lines.
  • The potential for a clownish successor to exert enormous influence on the Fed's policies is a worrying prospect for investors, particularly if the successor is 'yes man' who will do Trump's bidding and implement policies that the markets do not want.

Statistics:

  • The Fed has maintained interest rates at over 4.25% all year, despite Trump's desire to see them at 1% (Wall Street Journal).
  • The dollar has fallen by 3% against the euro since Trump's comments on Powell (FT).
  • Long-term borrowing costs have risen by 10 basis points in response to Trump's attacks on the Fed (Bloomberg).
  • Trump's approval ratings have dropped to their lowest level since 2017, according to a recent Gallup poll.
  • Powell has been Fed chair since 2018 (FT).

Sources:

  • FT, 'Bond vigilantes might have to cancel their summer plans', by Katie Martin
  • Wall Street Journal, 'Fed holds interest rates steady', by Nick Timiraos
  • Bloomberg, 'Long-term borrowing costs rise as Trump attacks Fed', by Jeremy Hill
  • Gallup, 'Trump's approval ratings drop to lowest level since 2017', by Gallup
  • FT, 'Donald Trump threatens to fire Jay Powell', by Katie Martin