The latest Trump-related pivot in stock markets appears to have been triggered by the US president’s verbal attack on Federal Reserve chairman Jerome Powell.
In a social media post over the weekend, Trump called Powell “a major loser” claiming he has been consistently too slow in responding to changes in the US economy.
“There can be a SLOWING of the economy unless Mr Too Late, a major loser, lowers interest rates, NOW,” he wrote.
Trump wants Powell to lower interest rates to boost the economy but Powell has instead been warning that Trump’s trade policies have muddied the water, complicating the path for interest rate decisions. Last week, Powell warned that escalating tariffs could reignite inflation and that the Fed’s obligation was “to keep longer-term inflation expectations well-anchored”.
Unnerved by Trump’s invective and Powell’s warnings about the deteriorating outlook and the apparent division at the heart of the US economy, investors took fright. Markets plunged again on Monday.
What does the Fed do?
The US central bank has a dual mandate: to control prices and maximise employment (in contrast the European Central Bank has only one mandate: to control prices). It typically does this through interest rates, lifting them when things get too hot, lowering them when economic activity becomes sluggish.
Over the past few years, it has been trying to bring down inflation, which peaked at over 9 per cent in the US in 2022. At the height of the inflationary crisis, it lifted interest rates to over 5 per cent.
What’s Trump beef?
The US president’s increasingly erratic trade policies have roiled markets and spooked investors. Trump believes an interest rate reduction would allay these market jitters and soften the impact of the tariffs themselves.
“CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS,” Trump shouted in a social media post earlier this month.
So far, the US central bank has resisted. At its last two meetings, in January and March, it left rates unchanged at 4.25-4.5 per cent, effectively pausing the rate-cutting cycle it had started last year, citing economic uncertainty.
Can Trump compel Powell to lower interest rates?
Since the 1970s, the Fed has acted independently of government and this separation of powers is viewed as sacrosanct in most quarters. Powell insists the Fed’s independence “is a matter of law” and that its independence has broad support across both political parties “and on both sides of the hill”.
But the US supreme court is considering a case that, in theory, would make it easier for the president to sack high-ranking federal officials and the new Washington administration seems intent on ripping up the rule book.
“If I want him out, he’ll be out of there real fast, believe me,” Trump has said previously.
So what’s going to happen?
On Tuesday, Trump appeared to soften his stance, saying he has no plans to fire Powell, while insisting he just wants interest rates to be lower. “I have no intention of firing him,” Trump told reporters in the Oval Office. “I would like to see him be a little more active in terms of his idea to lower interest rates,” he said.
That said, the Fed’s next meeting on May 6th-7th looks like a showdown between it and the White House. Markets have priced in several Fed cuts this year but the tariff turmoil, as Powell contends, complicates matters.
Energy prices in the US have fallen for the past two months, in part because oil costs have fallen on the back of fears that global growth is slowing, but food prices remain on an upward curve and overall inflation remains above the Fed’s 2 per cent target. Trump needs this deterioration halted, Powell is fearful that the government’s trade policy will stoke inflation. Who will blink first?
