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Well said, Jerome Powell. The chair of the US Federal Reserve responded to news of a subpoena from the US Department of Justice with a statement that was extraordinary, necessary and stark.
A criminal investigation into the Fed, and him personally, over the renovation of the central bank’s headquarters is an attempt to bully officials into setting policy according to the president’s whims, said Powell: “This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions, or whether instead monetary policy will be directed by political pressure or intimidation.”
It definitely needed to be spelled out. It is one thing for Trump to whine and hurl insults – Powell has previously been called a “stubborn mule” for not cutting interest rates faster – or even fantasise in public about firing him. But it is a different order of seriousness if the DoJ is involved, even if Trump denied knowledge of its investigation.
On day one, financial markets took a ho-hum view of a scene that could come from a banana republic. The dollar weakened, but only slightly, and US treasuries suffered modest selling pressure.
The sanguine reaction probably flows from a few factors. First, this affair could fizzle out. An overspend on the refurbishment of a public building hardly seems like the stuff of criminal charges. Second, Powell’s term ends in May. Third, a whole Fed committee sets rates so, if Powell’s current colleagues prize their independence as he does, Trump can’t impose his will overnight even if picks a tame poodle as the next chair. Fourth, the Fed is in cutting mode on rates currently anyway, so the policy quarrel is about pace rather than a more fundamental “up or down” question.
Yet Powell is plainly right to sound the alarm because it is not hard to imagine how tensions could escalate, especially if the next debate on rates is more basic. This is a perilous moment for the US to mess with the principle that rate-setters under an independent system should be free of political pressure – and be seen to be so.
The country is running an enormous fiscal deficit, and the data on unemployment and prices is giving mixed signals. While the headline growth numbers are still decent, momentum is slowing. One can also question how much work is being done by the boom in spending on AI, which is vulnerable (possibly) if returns on capital don’t match the promoters’ hype. Complicating matters further, the medium-term effect on inflation of Trump’s tariff policies will only start to become clearer this year.
Owners of US assets and US bonds, you can be sure, would want the country’s central bank to anchor inflation expectations firmly. “A combination of hot inflation and more bets on the Fed’s loss of independence would feed real rate concerns that could cause major dollar depreciation,” say ING’s currency analysts.
You bet. The dollar fell last year on a trade-weighted basis. Any flight from US assets would only increase, via the bond markets, long-term borrowing costs for US businesses and consumers. Therein lies the self-defeating aspect of wrecking confidence in US monetary policymaking, as wiser heads in the Republican party understood on Monday.
Does Trump himself recognise how undermining the Fed would backfire on him, and the US? For now, markets seem to cling to the idea that he does – and that he will push things only so far. That assumption, though, remains untested and smacks of complacency given that the administration’s war on the Fed has been running for a year. A pre-emptive revolt in US bond markets would be useful at this point.
