Earlier this month, Fed Chair Jerome PowellIndicated a changeIn the September Federal Open Market Committee meeting, it was easy to reduce the policy in the stand of Fed. The US stock market and bond market held a rally in response to this development.
However, soon after this, President Trump carried forward his attacks on the Federal ReserveAnnouncing that he will set fireFed Governor Lisa Cook allegedly cook for cheating in hostage application. It represented the first firing of a governor in the history of the Fed.
The editorial of a wall street journal is called Action A “Called putchGiven that the rift on hostage fraud is only aimed at the purpose of Trump’s opponents. The editorial also claimed that criminal referral was a direct threat to other fed governors: “cut rates or. ,
The Editorial Board of the Financial Times has written that the belief that Fed will determine the rates based on its own economic decisions “severe blow“To weaken it with Trump’s determination.
While other US presidents have pressurized the Fed chair to reduce monetary policy, they did not attempt to gain control over the fed. However, CNBC reports that President Trump said in a cabinet meeting last week that “We will have a majority [of Fed governors] Quite quick,
Former President of New York Federal Reserve, Bill Doodley noticed that if Cook was booted from the Board of Governors,Trump may soon appoint four of the central bank governors,
If so, the board may refuse to appoint some or all 12 regional Federal Reserve Banks of Presidents, of which five votes on the basis of rotation to the Federal Open Market Committee.
Meanwhile, if the Fed is politicized, what can happen, many stories about its consequences have been warned.
The nearest example is what happened after President Richard NixonPressed chair Arthur BurnsIn the early 1970s, the closing of inflation should avoid raising interest rates. This contributed to the sale of stock, bonds and dollars.
However, despite these warnings, the US Bond Market has not reacted to the events so far, which has asked many observers why.
I have to take that in addition to the TCO theory, there are three admirable explanations that “Trump always take out chickens.”
The first is that investors believe that the Supreme Court will stop Trump’s efforts to control the fed. In itsRulingTo allow the President to remove members of the National Labor Relations Board, Rai indicated thatIt is not necessary that Fed Governors and Federal Open Market Committee members came into forceThe court thus recognized the importance of maintaining Fed’s freedom.
This can explain why Trump has stopped Powell from accusing the misleading CongressCost overranIn remodeling of the Federal Reserve building.
Another possibility is that bond investors believe that two trump appointments support freedom. Government appointed by Trump. Michelle Boman and Christopher WallerDisagreementIn the July Federal Open Market Committee meeting, in favor of reducing the interest rates on the basis that the tariff was likely to increase the price and the labor market was softening.
Powell indicated that he came around the scene at the Jackson Hole Conference.
The decision to appoint Trump’s Stephen Miran to fill a temporary vacancy on the Board of Governors, however, may provide a battle test for the Fed Freedom.
In March 2024,Meeran co-written a policy brief calling for fed reformsThis will allow all top officials to be subject to dismissal by the White House. The argument was that it would make the central-bank policy more accountable to the democratic process.
A third interpretation is that bond investors believe that the fed should be low in interest rates, especially if softening the labor market is a precursor to high unemployment.
In view of today’s soft Report of jobs For August, the Bond Market is pricing in the rate of federal funds this year in a three-fourth point cut, next year and with cuts. Bondholders see a gradual passage for low rates as they also believe that inflation is temporarily higher as a result of high tariffs.
However,Treasure Secretary Scott BesantSaid that the Fed can reduce the rate of funds by half percent in September in view of the weak employment number and 1 July Consumer Price Index report. He called the current rates “very constructive”, and said that the rate of money should be 150 to 175 basis points.
My assessment is that Fed would slowly move forward until Trump announces who would convert Powell into the next Fed chair. If the appointment is acceptable to investors, the financial markets may remain calm for a while.
But if the fed is politicized, the risk is that the yield curve would move forward and the dollar will come under new pressure, as it was in early April.
If this is the case,The big unknown is whether Bessent will once again step into the breechAnd Trump assured that it is time to retreat from the fed and call for low interest rates.
Nicholas Sargane, PhD, Fort Washington is an economic advisor for investment advisors and is also affiliated to Dordon School of Business University in Virginia. He has written three booksInvestment in Trump era: How economic policies affect financial markets.
