Trump has repeatedly said he now wants to cut tax rates to help stimulate economic growth as he rolls out tariff plans and threatens fire-willed director Jerome Powell, putting banks and the White House in collision courses if he doesn’t comply, analysts warn that it could undermine U.S. financial markets.
“If I want him out, he will leave there soon,” Trump said Thursday.
Powell said he had no plans to step down early, adding this week that he believed the bank’s independence from monetary policy was a “legal issue.”
Diane Swonk, chief economist at KPMG, told AFP that referring to the White House, “It’s clear that the Fed chairman believes that he has to address this fact means they are serious.”
Stephanie Roth, chief economist at Wolfe Research, said she believes “they will clash” but does not believe that “the Fed will succumb to political pressure.
“They won’t react because Trump announced that it should cut it,” Ross said in an interview, adding that it was the “secret of disaster” for the U.S. economy.
Feeding independence “absolute criticism”
Many legal scholars say the U.S. president has no right to fire the Federal Reserve chairman or any of his colleagues on the bank’s 19-member set committee for any reason.
The Fed system, created more than a century ago, is also designed to protect the U.S. central bank from political intervention.
“Independence is absolutely crucial to the Fed,” Ross said. “Countries without independent central banks have significantly weaker currencies and significantly higher interest rates.”
“We have strong evidence that it’s a very bad idea to damage central bank independence,” Moody’s chief economist told AFP.
“No control over the bond market”
The serious threat to Fed independence comes from a case filed by the Trump administration, which attempts to challenge the 1935 Supreme Court ruling denies that the U.S. president fired heads of independent government agencies.
Humphrey’s executor case could have a serious impact on the Fed because of its status as an independent agency whose leadership believes it cannot be fired by the president for any reason, but for reasons.
Even if the Trump administration succeeds in its case, it may soon encounter the final guardrail of the Fed’s independence: the bond market.
U.S. government bond yields surged and the dollar fell amid the recent market turmoil released by Trump’s tariff plans, suggesting investors may not see the U.S. as a safe haven investment.
Faced with a sharp rise in U.S. fiscal yields, the Trump administration suspended its plans to higher tariffs on dozens of countries, a move that helped calm financial markets.
If investors believe that the Fed’s independence in dealing with inflation is compromised, it is likely to push the yield on long-term government bonds, assuming inflation will be higher and putting pressure on the government.
“You can’t control the bond market. That’s the moral of the story,” Swonk said.
“That’s why you want an independent Fed.”
