The market is telling Trump to stop interfering with Federal Reserve independence

The main news of the day today is the US Department of Justice
subpoenaing the Federal Reserve in an unprecedented move
that escalates the ongoing conflict between President Trump and Fed Chair
Powell for not lowering interest rates faster.

The official reason is that
the DOJ is focusing on the renovation to see
whether Powell made misleading or false statements to the Senate Banking
Committee regarding the scale, costs and luxury features of the project.

In reality, everybody knows
that this is just a political pretext to intimidate the Fed Chair and force him
to cut interest rates faster. We have already seen this kind of intimidation
with Fed Governor Cook last year when Trump tried to fire her for cause without
success as we continue to await the US Supreme Court decision on that case.

The market reaction to the news was pretty straightforward and a taste of what it could be if the Fed lost independence (I touched on the consequences here).

A potential loss of Fed independence raises the risk of uncontrolled inflation and eventually stagflation. Gold, and precious metals in general, would be the best beneficiaries from such an event, while the US Dollar would be the obvious loser. The stock market would likely go into a bear market on growth fears, while long-term interest rates would increase (the opposite of what Trump wants).

The negative consequences though would stretch to the global economy as a whole. The Federal Reserve is the anchor of the global financial system. The U.S. Treasuries are considered the benchmark “risk-free rate” and almost all global debt is priced as US Treasury rate + risk spread. If long term rates were to increase in the US, they would also influence long-term interest rates of other major economies. The initial reaction would highly likely be chaos and uncertainty in the global financial markets.

The good news is that even if the DOJ were to officially indict Powell for “misleading Congress” or “misuse of funds”, and Trump were to fire Powell “for cause”, the Fed Chair has already signalled that he would fight any removal in court, much like what happened with Fed’s Cook. The ultimate decision would likely rest with the US Supreme Court.

Nevertheless, the initial reaction to the DOJ indictment would be similar to the one we saw today, but bigger in magnitude.

This article was written by Giuseppe Dellamotta at investinglive.com.