Trump’s ‘direct attack’ on US Fed sends shockwaves around the world – National
The US Justice Department’s investigation into the US Federal Reserve and the controversial response of chairman Jerome Powell have raised the stakes in a long-standing dispute that has put the independence of the world’s most powerful bank on the line, investors said.
In a powerful statement on Sunday, Powell exposed the investigation that threatened to incriminate him with criminal charges over the building renovation project, saying it was “an excuse” to gain political influence over the Fed to cut interest rates quickly.
US President Donald Trump told NBC that he had no knowledge of the Justice Department’s actions, but he renewed his attacks on Powell that have grown more often and pointed out that the Fed chose to cut rates less than he would have liked.
The investigation and Powell’s direct response significantly increases the line where market observers fear the risk of increasing the independence of the Fed, the pillar of American economic policy and the basis of its financial system.
It also highlights how the Trump administration’s efforts to reshape institutions from the military to the judiciary are about to face the pillar of America’s financial power.
The US dollar was lower – albeit lower – against all major currencies during the Asian session on Monday. Gold rallied, US stock futures fell and markets priced in the high possibility of a short-term interest rate cut.
The Canadian dollar rose in value on Monday morning as the US dollar fell.
“Fed Chairman Powell has deviated from his previous approach to Trump’s threats, this time choosing to directly address the elephant in the room – that the Fed is not moving rates as much as the President would like,” said Damien Boey, portfolio manager at Wilson Asset Management in Sydney.
“Gold has strengthened, equities have wobbled, and the yield curve has flattened. These moves were broadly in line with the playbook for attacks on the Fed’s independence,” he said.
The ability of central banks to move, at least in setting interest rates, without political interference is considered the main point of modern economics – to protect monetary policy makers so that they can make decisions for long-term stability.
For investors, trust in US institutions is part of the so-called “great privilege” that the country enjoys in the financial markets as the issuer of the world’s reserves and receives billions of dollars in capital inflows.
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Karl Schamotta, chief market strategist at Corpay in Toronto pointed to the “unintended consequences” of leaning on the Fed.
“By trying to influence the central bank through aggressive legal threats against individual officials, the administration could drive up expected inflation, destroy the dollar’s safety net role, and cause a sharp rise in long-term bond yields that raises borrowing costs throughout the American economy.
“Pouring gasoline everywhere and playing with matches usually doesn’t work well,” he said.
‘THE TECHNOCRATIC FED IS WITHERING AT SIGHT’
Powell’s resignation is somewhat key to the split, as his term as chairman is set to expire in May and Trump has promised that his nominee will be “someone who believes in very, very low interest rates.”
But his stance will be the framework for any change and serve as a placeholder for shifts in the Fed’s path.
Richard Yetsenga, ANZ’s chief economist, said that for US financial markets as a whole, the performance of all three arms of the Fed’s policy will likely fluctuate – rates, balance sheets and banking sector regulation.
“It’s certainly too early (to tell), but the trends seem clear … the technocratic Fed, as we’ve understood it for the past few decades, is fading from view,” he said.
Meanwhile, investors, who are beginning to wonder if their portfolios are over-allocated to the US, are wary of new types of risks that the Trump administration is taking.
“The market made a lot of noise during the Fed and Fed liberalization and I think it is likely to do it again, but in the long run things will break down,” said Christopher Hodge, chief US economist at French investment bank Natixis.
To be sure, market movements were minimal on Monday and some saw the clear effect on interest rates again as a sign that Trump actually has no influence on the Fed.
“Investors are not going to be happy about it, but it shows that Trump really has no other options,” said Andrew Lilley, chief rates strategist at Australian investment bank Barrenjoey.
“The money rate will stay at what the majority of the FOMC wants it to be,” he said, referring to the Federal Open Market Committee, which sets interest rates.
Still, lingering doubts about the Fed’s freedom to move as it sees fit in the future are now planted in the minds of investors.
“I think I’m not sure yet how strong and hostile the Fed’s attack could be,” said Vishnu Varathan, head of Asia ex-Japan research at Mizuho in Singapore.
“(But) the question of Fed independence is well and alive and probably subject to re-examination every few meetings.”
– By file from Global Ari Rabinovitch
