Trump's Fed Fiasco: Economists Warn of Backfire as President's Attacks on Central Bank Erode Independence

Strategic Insights -

The US President's efforts to pressure the Federal Reserve to cut interest rates may backfire spectacularly, economists have warned, as his attacks on the central bank's independence lead to a widening gap between two- and 30-year Treasury yields, and a weaker dollar. Trump's criticism of Fed chief Jay Powell, whom he has called a "moron" and a "stubborn mule", has reached a new pitch, with the president moving to fire governor Lisa Cook, whom his administration has accused of lying on her mortgage applications. Economists say that should Trump acolytes form a majority on the Fed's board, the central bank's credibility could be eroded, leading to higher long-term borrowing costs.

Key Takeaways:

  • Economists warn that Trump's attacks on the Federal Reserve could lead to higher long-term borrowing costs, with the gap between two- and 30-year Treasury yields reaching the widest level in three years.
  • The US dollar has slipped 0.2 per cent against a basket of half a dozen peers, and inflation risk is rising, according to Priya Misra, a portfolio manager at JPMorgan Asset Management.
  • Stephen Brown at Capital Economics says that a politicized Fed "risks greater uncertainty about the interest rate outlook and, by extension, higher long-term interest rates".
  • The weighted average maturity of the country's outstanding debt is about six years, meaning that long-term rates will have a greater effect on US borrowing costs.
  • Claudia Sahm of New Century Advisors suggests that if long-term borrowing costs rise more aggressively, the Fed could use its crisis-era bond-buying programmes to bring them down.
  • Several experts say the confrontation is heading for a fierce legal battle that could end up in the Supreme Court.
  • White House spokesperson Kush Desai says Trump has acted within his lawful authority to remove a governor for cause, but economists stress that there are institutional protections to Fed independence.

Statistics:

  • The gap between two- and 30-year Treasury yields has reached its widest level in three years.
  • The US dollar has slipped 0.2 per cent against a basket of half a dozen peers.
  • The weighted average maturity of the country's outstanding debt is approximately six years.
  • The federal funds rate, which reflects overnight borrowing costs between US lenders, is currently between 4.25 and 4.5 per cent.
  • The Fed's tenure of governor Lisa Cook ends in January 2028.

Sources:

  • Stephen Brown, Capital Economics
  • Priya Misra, JPMorgan Asset Management
  • Claudia Sahm, New Century Advisors
  • Kush Desai, White House spokesperson
  • Mark Blyth, Brown University
  • Janet Yellen, former Fed chair
  • Blake Gwinn, RBC Capital Markets
  • Michael Nagle/Bloomberg