One of the most controversial features of President Donald Trump’s second term is his relentless criticism of Federal Reserve Chairman Jerome Powell to maintain interest rates.
But this is more than just rhetoric. Trump is actively trying to undermine the Fed’s board, threatening long known institutions of political independence. Ironically, this highly offensive puts backfiring at risk, deepening what Trump and others describe as the Fed “behind the curve,” potentially leading to a deeper selling of the US dollar.
Trump’s attack on the Fed
Last Thursday marked a new chapter in Trump’s campaign against the central bank. His administration took the unprecedented step of petitioning the U.S. Supreme Court to allow Federal Reserve Governor Lisa Cook to be fired. This will be the first forced removal of the federal government to sit down since the establishment in 1913.
The move, following a temporary judicial bloc issued by US District Jia Cobb, prevented the ouster of Biden’s appointee Cook, and put on hold further legal proceedings.
According to the Lloyd’s Bank Market Insights Team, such attacks are likely to increase as Powell enters the final months of his term as chairman. Stephen Miran, Trump’s recent appointee at the Fed, is already sought for a quicker firing rate reduction, and hopes that the bank will cut the benchmark borrowing costs by 50 basis points at a recently concluded meeting.
Behind the curve
At the heart of Trump’s campaign, Trump’s campaign reflects the desire for a more sensitive response due to his economic worldview, which demands a very low rate from the current 4%, with a very low rate of around 1%.
Trump claims that current fees will curb mortgage costs for many Americans, hinder homeownership and charge billions of unnecessary debt refinancing costs. He frames this as a phenomenal missed opportunity for an otherwise “surprising” economy. Meanwhile, many economists agree that fees are too high given the signs that weaken the labor market and consumer health.
Therefore, the Federal Reserve is widely recognized as “behind the curve.” This is a technical term that means it’s too late to cut costs in response to the evolving economic situation.
But the claim that Trump will force faster rate cuts reduces the risk of pushing the Fed further behind this curve.
If so, if they don’t, then they’re cursed
Imagine holding the world’s most powerful central bank reins. Not only is it the world’s largest economy, but it also handles USD, the fate of the global reserve currency. Now imagine the political pressure to quickly cut fees, despite fears that seem to have been politically compromised. This will ensure policy makers are not acting.
Thus, unlike typical policymakers who adjust with calm measured according to the data, Powell and his colleagues are now operating under intense political pressure and public scrutiny from the White House. They face the classic catch 22. They face accusations of succumbing to political pressure in the case of rapid speed reductions (even if they do so independently). It’s too long and puts potential deepening of the economy at risk.
This dynamic can breed reflexive stubbornness. To avoid accusations of surrender to political pressure, the Fed may instinctively lean towards attention – wait longer and raise the fee. However, this attitude can make the problem worse. Reducing delay rates will prevent monetary policy from syncing with the economic situation. This is like patients who resist mild medications just because they need dramatic doses after a sudden increase in fever.
The subsequent speed reductions in high doses can be interpreted by the market as a sign of panic, leading to increased volatility in financial markets, including cryptocurrencies.
Risk dollars
The CATCH-22 situation can also be weighed against the US dollar, a bullish development of assets caused by dollars such as gold and Bitcoin.
“Political pressure makes it difficult to shift to a more gentle footing accurately, leaving policy data behind rather than (and therefore slow).
The dollar index, which measures greenback’s value against major currencies, fell nearly 10% to 97.64 this year. Meanwhile, Bitcoin price rose 24% to $115,600.
