The financial world is reeling from a fresh wave of volatility, triggered by President Donald Trump’s escalating attacks on Federal Reserve Chair Jerome Powell. US stocks and the dollar plunged, reflecting growing investor anxiety over the potential for political interference in the central bank’s operations, and the broader implications for the U.S. economy.
In a series of social media posts, Trump lambasted Powell’s handling of monetary policy, accusing him of being “too slow” to cut interest rates. He argued that pre-emptive rate cuts are essential to prevent an economic slowdown, a sentiment that has been met with significant market unease.
“There can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW,”
Trump wrote, intensifying his already fraught relationship with the Fed chair.
Market Reaction
The immediate market reaction was stark. The S&P 500 fell by approximately 2.4% on Monday, bringing its year-to-date losses to around 12%. The Dow Jones Industrial Average mirrored this decline, dropping 2.5% and registering a 10% loss since January. The tech-heavy Nasdaq also suffered, falling more than 2.5% and marking an 18% decline since the start of the year.
Even traditionally safe-haven assets weren’t spared. The dollar index, which measures the dollar’s strength against a basket of currencies, hit its lowest level since 2022. Concurrently, interest rates on U.S. government debt rose. Signaling that investors are demanding higher returns to compensate for the increased uncertainty.
Global Markets on Edge
The ripple effects of Trump’s comments were felt across global markets. In Asia, trading was subdued, with Japan’s Nikkei 225 and Australia’s ASX 200 both registering slight declines. Hong Kong’s Hang Seng saw a marginal increase, but the overall sentiment remained cautious. Notably, gold prices surged to a record high, as investors sought refuge in the precious metal amidst the heightened uncertainty.
The Legality and Impact of Firing Powell
A key point of contention is whether Trump has the legal authority to remove Powell from his position. The Federal Reserve Act of 1913 stipulates that governors can only be removed “for cause,” typically interpreted as misconduct rather than policy disagreements. However, the act is less clear regarding the Fed chair’s position.
Legal experts note that there is no precedent for a president firing a Fed chair. Powell holds three key roles: chair of the Federal Reserve System, member of the Board of Governors, and chair of the Federal Open Market Committee (FOMC). Trump’s ability to remove him from each of these roles varies.
- Fed Chair: If Trump were to remove Powell as chair, he would remain a governor until his term expires in 2028.
- FOMC Head: Trump has no direct control over the FOMC’s leadership, which is chosen by its members.
- Governor: Removing Powell as a governor would have the most significant impact, allowing Trump to appoint a replacement. However, this move would likely face legal challenges.
Powell himself has stated that he believes he cannot be legally removed by the president.
Economic Implications and Global Concerns
The timing of Trump’s attacks is particularly concerning, as global economic policymakers gather for the spring meetings of the International Monetary Fund (IMF) and the World Bank. Economists warn that political interference in central bank independence could undermine financial stability and increase inflation.
Christopher Meissner, an economics professor at the University of California, Davis, emphasized the importance of central bank independence, stating, “The past 30 or 40 years what we’ve learned is that central bank independence is the key to financial stability and low inflation. And I think this is a major reversal and we have to watch out for it.”
The IMF is expected to release revised growth forecasts, which are likely to reflect a potential downturn in the U.S. economy. The traditional saying, “When the US sneezed, the rest of the world caught a cold,” underscores the global implications of any economic instability in the United States.
Looking Ahead
The coming weeks will be crucial in determining the trajectory of the U.S. economy and the relationship between the White House and the Federal Reserve. Investors will be closely monitoring any further developments, as the potential for political interference in monetary policy continues to cast a shadow over the markets.
