He wouldn’t. Would he?
As stock markets flirt with a bear, bonds are sold off, the US dollar fades and a global trade war gathers… is Donald Trump on the cusp of nuking the Fed?
As we reminded you last week, this is the ‘nightmare scenario’ analysts have been theorizing. But theory no longer. If the American president moves to take over and politicize monetary policy – as Pierre Poilievre has suggested in Canada – Mr. Market could go postal.
So the reaction this morning was no big surprise, after the MAGA boss posted this on his swampy social media site:
Yup, he called Jerome Powell “Mr. Too Late” and “a major loser”, plus accused him of manipulating interest rates to bolster Kamala Harris in the ’24 election. Trump clearly knows his tariffs are pushing the American economy towards recession, and thinks immediate interest rate cuts can paper over the inevitable by flooding the country with liquidity. He is also a vengeful, petty man. Trump may be the most power person on earth at the moment, but he can’t help stooping to exact revenge.
What’s at stake here?
Precedent: the Federal Reserve is independent, non-political and mandated with supporting the economy by stabilizing prices, the currency and the labour market. A primary function is keeping inflation under control, so the dollar is not debased. The Fed boss is appointed for a four-year term (Trump did that as 45) and was reappointed by Biden. He cannot be fired unless the Supreme Court says so (and the Trumpers are seeking it).
Price stability: Powell has warned that the White House tariffs and the retaliatory taxes they prompt are inflationary. Of course, they are. Every living economist agrees. But the US president, stewing in failed 19th Century economic policy, argues that tariffs will “make America rich” even as consumers are forced to pay more for everyday goods. (He got elected promising to reduce those prices. Oh well.)
The Fed succeeded in crashing inflation from over 9% to the 2% range, and is in no hurry to drop rates and let it rip again. Nor is the market. Cheaper money would be nice, but not at this cost.
The dollar: It’s been on a slide since Trump took office and started this tariff nonsense, especially as evidenced in the ludicrous ‘Liberation Day’ event. A lower dollar helps US exports, but renders imports more expensive – at the same time Trump is piling a heap of tariffs on those goods. A vicious circle. As these actions push Aerica into contraction, investors are selling off the greenback.
The bond market: Ditto for US Treasuries. In the seven days following Liberation Day now only did the stock market lose 12% of its value, but the yield on those key American bonds surged by a half point – a move so massive Trump panicked and paused his tariffs for 90 days. Stocks and bond prices normally do not decline together. But this is not normal.
Not only do Treasury notes and bonds underpin America’s $37 trillion in federal debt (a trillion is a thousand billion), but their risk-free status is the bedrock of the global financial system. If they melt down, we’d all better learn to like eating lichen and bugs. At the beating heart of the bond market’s credibility is the Fed – which issues the debt, determines short-term interest rates and whose guidance affects the longer-term market yields. By the way, Canada holds $350 billion in these bonds. China has twice that.
So the Fed’s in no hurry to cut interest rates which would fuel inflation, add stimulus, hasten the dollar’s decline and exacerbate economic upheaval. Not only is this bad for the country and the world, but it risks repeating the affordability crisis which defeated Joe Biden. Clearly, as Trump said about soaring car prices, due to tariffs, “I don’t care.”
And this is why markets are selling off (again) today. He’s nuts.
Nothing good ever happens when politicians seize control of the money supply. Not in the country considered to be the safest on earth. And not here.
About the picture: “Hi Garth, Spike here was wondering, since the US has a $30T economy, and 69% of it is consumer spending, why not just impose a 5% GST and raise a trillion?” writes Jay. “Elon can take care of the rest. And we all go back to sanity. Too simple?”
To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.