Investors on edge as Trump keeps feud with Powell alive, fuels fears of Fed independence

With his campaign against Federal Reserve Chair Jerome Powell, US President Donald Trump has rattled investors and triggered warnings from economists.

Since the beginning of his second term, Trump has trashed Powell for not lowering interest rates to his liking. In recent days, he has signalled that he may soon fire Powell and replace him with a puppet who would do his bidding. He has reportedly shared the plan with loyalist Republican lawmakers.

The independence of the Federal Reserve, and any central bank for that matter, is the foundation of a healthy economy. It ensures that the monetary policy prioritises long-term stability without pressure for short-term gains. It also ensures that the monetary policy is rooted in economic data and rationale and not in populist political compulsions — such as Trump's call to cut interest rates without caring about the action’s effects on inflation.

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After the news of Trump wanting to fire Powell emerged, the US dollar lost 1.2 per cent on Wednesday against global peers.

Even though Trump later said he was unlikely to fire Powell, the feeling that he will do it is something “you can see it in the markets” and there is an increased chance that he will fire Powell anyway at some point, Bill Campbell, a portfolio manager at bond-focused asset manager DoubleLine, told Financial Times.

Trump could reduce US to Turkey with war on Fed

With his campaign against Powell, Trump risks reducing the United States to Turkey.

President Recep Tayyip Erdogan of Turkey has frequently fired chiefs and other senior officials of the country’s central bank over the past decade and pressured it to reduce interest rates as per his populist agenda. The result was that the inflation rose from around 8 per cent in early 2010s to 80 per cent at its peak.

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Currently, as a result of Erdogan’s policy of killing the central bank’s independence and setting the monetary policy at his populist whims and fancies, the inflation is at 35 per cent in Turkey and the country is at the risk of falling into stagflation — a dangerous condition in which inflation and recession coexist.

Like Erdogan, Trump also wants the Fed to cut interest rates by up to 3 percentage points, but Powell has refrained from any cuts over fears that tariff-induced inflation could be worsened by any rate cuts. Last month, inflation rose in the United States to the highest point since Trump assumed charge.

The effects of Trump’s assault on the Fed will be global as the US economy is linked with that of the world.

“Given that the US dollar is so dominant in the global economy, and it’s a reserve currency, supplying a stable US dollar is a global public good. That’s why what is going on in the US matters to the rest of the world,” Stefan Ingves, a former governor of the Riksbank, Sweden’s central bank, told The New York Times.

Moreover, as the United States serves as a role model for the world, threats to the Fed’s independence could chip away at independence in other central banks, Katharine Neiss, an economist at PGIM Fixed Income, told The Times.

As to how it affects the economy, Neiss said that the current “environment of uncertainty” makes it hard to plan long-term investments and hurts economic growth and living standards as, in such an environment, “we don’t know what to trust, we don’t know who to trust”.