Federal institution requires overhaul rather than destructive actions by Trump, argues Ruth Sunderland.
War on the Fed: Should We Worry About Trump's attacks on the US Central Bank?
Donny D's war against the U.S. Federal Reserve (Fed) has everyone on edge.
Last week, on his 100th day in office, the President doubled down on his attacks, stating confidently: "You ain't gotta like 'em, but you gotta respect 'em - I know more about rates than they do."
This outburst was provoked by the Fed's reluctance to lower interest rates to Trump's liking.
Fed Chair Jerome Powell is caught between a rock and hard place: try to tamp down inflation sparks by Trump's trade wars, or risk economic downturn due to rate cuts needed for growth. It's like sailing between the six-headed Scylla and the whirlpool Charybdis. And we're not just talking Greek legends here.
If Powell and the Fed screw up, the result could be a dreaded double-whammy called stagflation: slow economic growth and high inflation. Ouch!
Trump seems clueless about the importance the market places on the Fed's independence. A failure to resist political pressure could effectively tank the Fed's ability to maintain control over inflation, by undermining trust in their ability to do so.
In a financial disaster, it's the Fed who steps up and helps steer the ship to safety. But if Donald Trump installs a lapdog to do his bidding, we'll lose an essential safety device.
According to reports, Trump has been eyeing possible replacements for Powell, including former Morgan Stanley banker Kevin Warsh, his rumored favorite.
So far, Trump seems to have abandoned the idea, but his verbal jabs at Powell have already left their mark.
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If Trump manages to undermine the credibility of whoever succeeds Powell, it could spell trouble for the new chairman's image.
Anyone stepping up to fill Powell's shoes is likely to be labeled a Trump puppet, the perception being they're enabling the President's unpredictable behavior and folly.
Markets thrive on grown-ups running the Fed. Trump, with his childish outbursts, seems to want a simpleton more interested in indulging his tantrums.
Glimpse of the UK Crisis: Liz Truss and the Bank of England
The same can be said of Truss's disastrous short-lived stint as prime minister. She wanted to can Bank of England governor Andrew Bailey because she saw him as an obstacle to her reckless economic plans.
The Bank was able to save the day when her notorious mini-budget sent ripples through the pension world, threatening meltdown.
The Fed, like the Bank of England, isn't completely free from political interference. But it does have the autonomy to set its own interest rates without political approval or influence.
Trump or any other president can't sack the Fed chairman on a whim.
The apparent ignorance of central bank independence on Trump's part hasn't gone unnoticed. Apologists for Trump claim this chaos and tantrums are all part of some secret master plan to fix a flawed system involving the Fed.
What we need is reform, not rampant destruction.
- Trump's ongoing critique of the Federal Reserve (Fed) and its chair, Jerome Powell, has raised concerns about potential political interference in monetary policy decisions.
- The Fed is currently grappling with the impact of Trump's trade wars on inflation, while also weighing the need for rate cuts to stimulate economic growth.
- An incorrect decision by the Fed could result in a stagflation scenario, characterized by slow economic growth and high inflation.
- Financial experts have highlighted the significance of the Fed's independence and expressed concerns about the potential for political pressure to undermine trust in the Fed's ability to effectively control inflation.
- If Trump succeeds in installing a politically compliant chair, it could compromise the Fed's ability to maintain control over inflation and potentially destabilize the financial market.
- The selection of a new Fed chair could impact the chair's credibility, as any perceived association with Trump's erratic policies may damage their standing in the financial community.
