Trump will be hit with $60bn bill if he sacks Powell

Yahoo

6 days ago

Donald Trump will be hit with a $60bn (£44bn) bill if he follows through on his threats to sack Federal Reserve chairman Jerome Powell, analysts have warned.
Ousting Mr Powell, the head of the US central bank, would send Treasury yields soaring, adding crippling costs to the government's debt interest bill as investors bet on the prospect of higher inflation and political instability.
Gennadiy Goldberg, the head of US rates strategy at TD Securities, said that if Mr Trump did oust the Fed Chair, it would add around $58bn to the government's interest bills.
The president suggested this week that he could sack Mr Powell over escalating costs in the $2.5bn renovation of the central bank.
After a flurry of reports warned that Mr Trump was preparing to oust the Fed chairman imminently on Wednesday, the president told reporters: 'I don't rule out anything but I think it's highly unlikely unless he has to leave for fraud.'
Mr Trump has been deeply critical of Mr Powell, who he has called a 'numbskull' for not cutting interest rates as the president wants.
If Mr Trump were to remove the Fed chairman, analysts warned bond investors would demand far higher rates to compensate for fears that the Fed would no longer operate free from government interference and would be less able to keep inflation under control.
Mr Goldberg said this would drive up yields on American debt repayable in 20 years and 30 years by between 20 and 50 percentage points, potentially pushing interest rates on these bonds to around 5.5pc.
In turn, this would add $58bn to the interest bill on the $276bn in 30-year Treasuries and $168bn in 20-year Treasuries that the US issues in a typical fiscal year, Mr Goldberg estimated.
This calculation assumes that yields stay at these levels and that government debt issuance patterns remain the same.
'If interest rates jump, the debt burden could very quickly become unsustainable,' said Mr Goldberg.
Alex Everett, a fund manager at Aberdeen, said that over the course of two or three months, the shock could add as much as a whole percentage point to 30-year Treasury yields, pushing the interest rate on these bonds to 6pc.
This would be the steepest rise in US Treasury yields since the 'Volcker shock' in the early 1980s when Paul Volcker, the then-Fed chairman, made large increases in interest rates to tame runaway inflation.
Mr Everett said: 'The difference then was that yields moved higher to reflect a Fed combating inflation. This time they'd likely be moving higher to reflect a Fed not combating inflation effectively.
'[Markets will think] inflation will not be kept under control by an institution that exists to moderate the economy.'
Sacking a Fed chairman would also push markets to make bets on more political instability and unchecked borrowing.
'It would be a very key progression point in Trump's agenda, you'd assume the next logical step is that he can push harder on other things,' Mr Everett said.
The surge in Treasury yields would be accompanied with a significant drop in the dollar that would hit investors hard, he added.
Higher borrowing costs would hit at a time when the government's debt interest bill was already forecast to soar from 3.2pc to 6.1pc by 2054, assuming the measures in Mr Trump's spending bill come to pass, according to analysis by the Committee for a Responsible Federal Budget.
Higher Treasury yields would also drive up mortgage rates, which are currently close to 7pc, further slowing housing market activity, at a time when sales are already at a 30-year low.
Broaden your horizons with award-winning British journalism. Try The Telegraph free for 1 month with unlimited access to our award-winning website, exclusive app, money-saving offers and more.