Since Donald Trump came to office, his attempts to goad the US central bank’s chair Jerome Powell into cutting interest rates have met with a dead bat. But like the perpetually bullied kid, Powell has had enough.
The former pacifist has turned pugilist. Powell is fighting back and the time for a biblical ‘Turning the other cheek’ is over.
Trump has spewed plenty of insults at Powell over the past year to pressure him and the Federal Reserve to lower interest rates – including but not limited to calling him ‘a stupid person’, a ‘total nincompoop’, a ‘numbskull’ and a ‘stubborn mule’.
But the Department of Justice (DOJ) move to issue subpoenas, threatening a criminal indictment relating to Powell’s testimony about cost overruns on the Fed’s head office renovations, represents a concoction that in Powell’s mind is too extreme to ignore.
Powell’s term as chair of the Fed ends in May and the convention has been that the Fed chair steps down as the governor of the central bank’s board at the same time. But Powell’s term as Fed governor doesn’t finish until 2028 and Trump’s nuclear legal move might give him all the inventiveness he needs to stay on and fight.
In other words the DOJ’s move could seriously backfire.
In a video announcement, Powell declared: “This new threat is not about my testimony last June or about the renovation of the Federal Reserve buildings. The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”
Powell has the backing of a host of luminary supporters including every living former chair of the Fed, as well as multiple former Treasury secretaries who described Trump’s nuclear ambush on Powell and the Fed as “prosecutorial attacks to undermine that independence.”
“This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly,” they wrote in a joint statement.
But what came next is even more bewildering. The markets have been concerned for months about Trump’s attempts to interfere with the independence of the Fed to determine interest rates. But instead of an equities and money market meltdown, the response so far has been benign.
Could this be another TACO (Trump always chickens out) moment? In other words, have the markets placed their bets on Trump bloviating an extreme position only to ultimately back away from it – a la the imposition of massive tariffs last year.
There were many investors who got caught by Trump’s partial reversal on tariffs last year. They sold equities when Trump announced tariffs but were then wedged when the market quickly recovered.
Or could it be that investors have been numbed by so many outlandish moves from the US president that they are experiencing Trump fatigue?
The hangover from New Year’s Day is barely over and Trump has already used the military to attack Venezuela and capture its leader, has threatened other countries including Colombia and Cuba and discussed a takeover of Greenland.
So heads were already spinning about the future of a rules-based order in a geopolitical sense, and then Trump went ahead with this week’s coup at the Federal Reserve.
One school of thought says that some investors are mulling a win-win scenario. If Trump loses his battle with the Fed then its independence will be maintained, which will be a net positive for global market, but if Trump wins and forces interest rates to go down, that would also provide a short-term boost to the sharemarket.
But attacking the spine of US institutions like the Federal Reserve has far more serious ramifications for US democracy and its fundamental institutional pillars.
Janet Yellen, who served as Fed chair between 2014 and 2018 and was among the statement’s signatories, summed it up, saying that the investigation constituted the most significant attack ever on the central bank’s independence.
“The fact that he is willing to go that far to intimidate a Fed official suggests he’s going to stop at nothing to get his way with respect to Fed policy,” she said.
“If you can bring charges for no reason whatsoever against your enemies, we’re no longer living in a society governed by the rule of law.” “That’s the end of Fed independence.”
It’s a scenario that is deeply unsettling and would undermine the rules-based order of the global financial markets. But you can bet Powell is not going to make it easy for Trump.
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