Trump's Fed Fiasco: A Recipe for Economic Turmoil

U.S. President Donald Trump's bold move to "fire" Governor Lisa Cook from the Federal Reserve Board has sparked a mix of alarm and complacency in financial markets. While investors initially shrugged off the announcement, considering it largely a symbolic gesture, they may soon realize that Trump's intentions go far beyond a simple power play. With the Fed's independence hanging in the balance, the consequences of a Trump-dominated central bank could be far-reaching, potentially leading to a surge in asset values and inflation, and even a market crash.

Key Takeaways:

• Trump's move to remove Governor Lisa Cook from the Fed's board is likely to be tied up in courts for months, but its outcome may not be the determining factor in market decisions.
• Trump's goal is to seize control of the Fed and make it subservient to his administration's policy, ending the institution's nearly century-long independence from political control.
• With a majority of Trump-appointed governors on the board, he has the opportunity to influence the selection of the next governors and potentially appoint like-minded individuals to the Federal Open Market Committee (FOMC).
• Trump's ability to stack the FOMC with his appointees could lead to a significant spike in stock prices, driven by lower borrowing costs, but also result in rising inflation and bond yields.
• The widening gap between short-term and long-term interest rates suggests that bond markets are already anticipating increasing long-term inflation.
• A Trump takeover of the Fed could lead to a "stock market rally for the ages and the mother of all crashes," resulting in a significant increase in gold prices as investors seek a safe haven from market turbulence.

Statistics:

• The seven members of the Fed's board of governors are each appointed by the President and confirmed by Senate for staggered 14-year terms.
• Two governors are previous Trump appointees, and a vacancy gives the President the opportunity to select a third governor.
• The board of governors has a majority of Trump-appointed members, but the Federal Open Market Committee (FOMC) has a minority of Trump-appointed members, with five members rotated through by the regional banks requiring approval from the board of governors.
• The current FOMC members' terms expire in February, allowing for potential Trump-appointed members to take over.
• The gap between short-term and long-term interest rates is widening, indicating that bond markets are already anticipating increasing long-term inflation.
• Bond prices are expected to rise as investors seek safe-haven assets, including gold.

Sources:

• The Globe and Mail, JOHN RAPLEY Contributing columnist. "The Fire Exchange: Trump Takes On the Fed." December 12, 2022.