Donald Trump is waging war with the US central bank, the Federal Reserve, and we should all be worried.
A short-lived truce broke out when the President backed down from a social media post suggesting he wanted to ‘terminate’ Jay Powell’s chairmanship of the Fed.
But as he marked his first 100 days in office last week, Trump renewed his attacks, saying: ‘You’re not supposed to criticise the Fed. You’re supposed to let him do his own thing – but I know much more than he does about interest rates.’
His wrath has been provoked by the Fed’s slowness – in Trump’s eyes – at cutting rates.
Powell, for his part, is concerned that inflation will be exacerbated by Trump’s tariffs. But set against that are fears of recession, which would call for rate cuts to boost sagging growth.
So the Fed is trying to steer a course through these two perils, with Powell cast as a latter day Odysseus, sailing gingerly between Scylla and Charybdis, the six-headed monster and the deadly whirlpool of Greek legend. Falling prey to one of these scenarios would be bad enough. Both at once would be the nightmare that is stagflation.
In the line of fire: Donald Trump is waging war with the Federal Reserve, and its boss Jerome Powell (pictured)
Trump’s behaviour suggests he has little grasp of the importance markets attach to the Fed’s independence. Faith in the Fed being willing or able to control inflation would be torpedoed.
In a financial crisis, markets rely on the central bank to be a big part of the solution.
If the President installs a cat’s paw to do his bidding, an important safety brake will have been lost.
Trump is reported to have been exploring ways of sacking Powell for some time, including with Kevin Warsh, the former Morgan Stanley banker widely touted as his favourite for a replacement.
He may have backed off from the idea for now. But his insults to Powell have already caused damage in themselves.
The President’s behaviour risks undermining the credibility of Warsh, or whoever he appoints next year as the new Fed chair.
Anyone willing to take on the role is liable to be seen as Trump stooge and an enabler for his chaos and incompetence.
Markets want a proper grown-up at the Fed – Trump, in his puerile outbursts, seems to want a weak parent willing to indulge his tantrums.
There was a mini-version of this in the UK during the short-lived prime ministership of Liz Truss. She wanted to sack Bank of England governor Andrew Bailey, who she saw as being a barrier to her un-costed growth plans for being ‘fatalistic about Britain’s decline’.
The Bank rode to the rescue when her notorious mini-Budget sparked a reaction in an obscure corner of the pensions world that threatened to morph into a full-blown meltdown.
The US central bank, like our own, does not have total autonomy. But it is free to make its own decisions on interest rates without political approval or interference.
Trump – or any other president – cannot sack a Fed chairman on a whim.
The apparent lack of comprehension of central bank independence on the part of the President is par for the course.
He seems wilfully blind to the jeopardy he is creating for the financial system through his madcap policies. There is hope the bond market may make him see sense.
Apologists for Trump try to present the chaos and the outbursts as part of some genius plan to change a deeply flawed system of which the Fed is part.
What is needed is reform, not vandalism.
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .