Trump shows his impotence attacking the Fed chair

Sydney Morning Herald

a day ago

'If they were doing their job properly our Country would be saving Trillions of Dollars in Interest Cost.
'The board just sits there and watches, so they are equally to blame,' he wrote.
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On Friday, Trump urged Powell - whose term as chair expires next May - to resign, and said he would only pick a Powell successor who will cut US rates.
Trump's verbal assault on Powell, who he described as a 'stubborn mule' – he's previously said Powell is a bad person, stupid, terrible, a numbskull, an idiot and suffering from Trump derangement syndrome – has intensified since the US central bank chief made it clear after last month's Fed meeting, that the board would wait for the effects of Trump's tariffs before making any move on rates.
So far, there have been only very minor signs that the tariffs are impacting the US inflation rate, but that is to be expected.
In place, to date, are the 10 per cent baseline tariff on all imports to the US, along with some specific tariffs on sectors like steel and aluminium. The 'big ones' – the 'reciprocal' tariffs tailored to individual countries' exports to the US -- won't be unveiled until next Wednesday and could take months to show up in inflation data.
The risk of cutting rates prematurely and then seeing a tariff-driven spike in the inflation rate explains why the Fed has adopted a 'wait and see' approach to its monetary policies. The relatively strong US economy and job market at present provide no obvious downside to being patient.
Trump is impatient – he wants the Fed to cut its target for the federal funds rate from its current range of 4.25 to 4.5 per cent to between 1 and 2 per cent – because he's about to inject a debt-funded fiscal boost into the economy.
The US Senate narrowly approved Trump's One Big Beautiful Bill Act on Tuesday (thanks to vice president JD Vance's casting vote) after a marathon 24-hour session.
That bill, whose measures and cost might be changed when it returns to the House, would add between $US3.3 trillion ($5 trillion) and $US4 trillion ($6.1 trillion) to US deficits and debt over the next decade.
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With the interest costs on US government debt already running at about $US1 trillion a year, the new debt generated by that bill will add hundreds of billions more – unless the Fed cuts rates. Hence Trump's comment that hundred of billions of dollars are being lost because of its inaction.
The problem for the Fed, and Trump, is that the central bank's mandate is to promote price stability and maximum employment, not to enable the US government to borrow more cheaply.
Trump's attempts to coerce Powell and his fellow board members into cutting rates to help him politically, if they succeeded, would undermine the Fed's credibility and the trust in it as an institution independent of politics and politicians.
That independence is important for the Fed's ability to influence inflation expectations and guide and reassure financial market participants that its policies are consistent and predictable, which is fundamental to financial stability.
The risk for America is that, if investors see the Fed's independence compromised and its policies driven by political considerations, there'd be an exodus of capital. Given the deluge of US debt that will need to be financed and refinanced in the bond market, that would itself push interest rates up.
Confidence in the Fed and other respected central banks rests on their predictability, and a conviction that their monetary policy settings will either be neutral or, when necessary, counter-cyclical to keep inflation rates under control.
Pro-cyclical settings – policies influenced by the demands of politicians who face relatively short political cycles and who want growth regardless of the longer-term consequences – would risk igniting inflation.
Trump might want a rate-cutter in Powell's chair but, if that were to eventuate, it would be damaging to the Fed, the bond market and the US dollar, which just experienced its weakest first half of the year in more than half a century. US bond funds have had their biggest net outflows since the pandemic. Trump's trade wars are being blamed for both.
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While there has been speculation that Trump will soon appoint a 'shadow chair' whose presence (and utterings) could confuse markets and undermine Powell, US Treasury Secretary Scott Bessent has said it is possible that the White House will nominate a candidate to the board in October or November.
Powell is in the chair until May and has no plans to vacate until then and Trump, despite continually musing about it, has no power to remove him any earlier. But the term of one of the Fed's governors, Adriana Kugler, ends in January and Trump's 'shadow' chair could be inserted into the board then.
The credibility of Powell's successor would, of course, be compromised if they were seen as a Trump stooge - although Trump's expectations of the next chair's influence might be a tad unrealistic. There are 19 members of the Federal Open Market Committee, and 12 voting members. The committee, which actually makes rate decisions, can elect its own chair.
One person, even the Fed chair, can't dictate outcomes and a Fed chair whose public commentary was at odds with the bank's decisions would only confuse markets and damage the institution.
Powell is fortunate that even the US Supreme Court seems to believe Trump can't force him out of the Fed.
Where Trump can threaten Elon Musk (a naturalised US citizen) with deportation to South Africa, or siccing Musk's former DOGE colleagues on him, his companies and the billions of dollars of taxpayer support they receive each year, all Trump can do to Powell really is continue to abuse him.
When Trump attacks Musk (who is again fiercely criticising the One Big Beautiful Bill's impact on US deficits and debt), it costs the former First Buddy and his investors serious amounts of money. Tesla shares fell more than 5 per cent on Tuesday, wiping about $US55 billion off its market capitalisation.