US President Donald Trump has again rattled global investment markets, this time with his threats to interfere with the independence of America’s central bank.
The president has ramped up his war with the US Federal Reserve, calling chair Jerome Powell a “major loser” and demanding interest rates be cut immediately, in a re-run of his first term tirade against the head of the world’s most powerful central bank.
His attacks follow comments from Powell last week over the new administration’s tariff policies.
“These are very fundamental policy changes,” Mr Powell told the Economic Club of Chicago.
“There isn’t a modern experience of how to think about this.”
He said the tariff levels were “significantly larger than anticipated” and that they could result in both lower growth and higher inflation, making it difficult for the Fed to react, essentially ruling out a rate cut.
While those comments sent stocks sharply lower on Thursday, Mr Trump’s attacks over the weekend, including confirmation from Kevin Hassett, Director of the National Economic Council, that Mr Trump was examining whether it would be possible to fire Powell, sent Wall Street plunging again on Monday.
On Thursday, US time, Mr Trump posted on social media that Mr Powell’s termination could not come fast enough. On Monday, he doubled down, labelling the Fed chair “Mr Too Late, a major loser”.
“I think that is terrifying markets, because a politicised Fed would be one in which we see much higher inflation, and accordingly, much higher interest rates eventually, which would ultimately lead stock markets into a massive crash,” said Monash University economist Zac Gross.
Once again, the falls weren’t confined to stocks.
Bond prices also fell, sending market interest rates higher, a trend that first emerged a fortnight ago and which forced the president to delay implementing his “Liberation Day” tariffs by three months.
In addition, the US dollar came under renewed attack as nervous investors, concerned about a compromised US Fed, abandoned US government bonds and shifted their money out of the country and instead headed to alternative safe havens such as the Swiss franc and gold.
“You almost need a degree in psychology to forecast where the economy and stock market are going,” Dr Gross told ABC News.
“That’s because almost everything that’s happening is happening through the actions of one man, Donald Trump,” he said.
“So, the real question of whether the stock market is going to continue falling, or maybe even stage recovery is really a question of ‘Is Donald Trump going to stop hitting the economy in the face with his own policy decisions?'”
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Can Trump fire US Fed chair Powell?
The Federal Reserve lawyers believe the US president doesn’t have the power to fire Jerome Powell.
But the US Supreme Court is expected to rule within days about whether Mr Trump has the authority to remove board members from two other independent agencies, which may embolden him to move against Mr Powell.
The White House has repeatedly attacked the judiciary, Congress and the bureaucracy for any decisions that are not in keeping with its decrees.
While Mr Trump’s actions so far have resulted in large-scale demonstrations and public outpourings of anger, the global reaction on financial markets — which now are openly challenging almost a century of US dominance — will be difficult for the new administration to ignore.
Even if Mr Trump can crowbar Mr Powell out of the job, he may not succeed in forcing the institution to bend to his will.
There are six other members on the Financial Open Markets Committee that make monetary policy decisions who may resist any attempt to interfere in interest rate settings.
While Mr Powell’s role as chair expires in May next year, he would be entitled to remain on the board until 2028 — which, given his previous determination to resist being removed by the president, could make life difficult for any new appointee.
Foremost among those reportedly being considered for the role is White House economics adviser Kevin Hassett, the very man who confirmed the president was looking at legal avenues to unseat Mr Powell.
White House economic advisor Kevin Hassett says Mr Trump was examining whether it would be possible to fire Mr Powell. (Reuters: Kevin Lamarque)
The prospect of turmoil and instability at the very top of the world’s biggest central bank and a protracted Supreme Court battle over who should run the organisation is undermining America’s financial dominance and authority, as the ongoing market ructions demonstrate.
“Financial markets are… aware of certainly the damage that such a fight would cause,” Dr Gross said.
The economist also pointed out that even if Mr Powell remained in the job, at some stage he would have to step aside, delivering the president the latitude to appoint someone more pliable.
Inevitably, that will lead to further uncertainty and volatility on global markets.
“Anytime Donald Trump indicates that he’s willing to intervene in a way that’s going to cause economic harm and disruption that’s going to be reflected in the financial markets.“
