analysis
Central bank conflict escalates
What danger Trump’s attack on the Fed poses
US President Trump threatens to indict Federal Reserve Chairman Powell. He obviously sees the Fed’s independence as being threatened. If the central bank were politically controlled, it would have consequences – far beyond the USA.
It is an unprecedented event in the history of the US Federal Reserve: Fed Chairman Jerome Powell addressed the public in a video statement. In it, he comments on the US Department of Justice’s subpoena threatening him with charges in connection with the renovation of Fed buildings.
Powell speaks of “pretext”
With unusual candor, Powell makes it clear that for him this lawsuit is just a “pretext”: “The threat of criminal consequences is a consequence of the Federal Reserve setting interest rates based on our best estimate of what is in the public’s interest, rather than following the President’s preferences.”
Powell said the stakes are high: whether the Fed will continue to be able to set interest rates based on facts and economic conditions – or whether monetary policy will instead be determined by political pressure or intimidation.
Gold rises to record high – Bettina Seidl, HR
Economists are alarmed
“The Fed apparently sees its independence in such danger that it wants to mobilize the public,” says Commerzbank economist Bernd Weidensteiner, commenting on the extraordinary approach. The conflict between the government and the central bank has reached a new level.
Economists and market observers worldwide are alarmed. Andrew Lilley from the investment bank Barrenjoey in Sydney warns that Trump is tugging at the loose threads of the central bank’s independence.
Stocks in the red, gold at a record high
In fact, this is not Trump’s first attack on the Fed’s independence. He tried to fire Fed Governor Lisa Cook – the case is currently before the Supreme Court. He also pushed Powell for more interest rate cuts, often with insulting posts on his Truth Social platform.
The renewed escalation in the dispute between Trump and the Fed is causing turmoil on the financial markets: US futures are deep in the red, and Wall Street is likely to start the trading week with significant losses. Investors are fleeing stocks, dollars and US government bonds – and into safe havens like gold. The yellow precious metal costs more than $4,600 for the first time.
What happens when Powell’s term ends?
So far, the market has underestimated the monetary policy risks of Trump’s repeated attacks on the Fed’s independence. It remains to be seen whether the threat of legal action against Powell will wake up one or other market participants in the long term.
Especially since Powell’s term at the top of the US Federal Reserve ends in May and Trump is then expected to appoint a Fed chief loyal to him. At the moment it all boils down to his henchman and top economic advisor Kevin Hassett. Experts expect significant interest rate cuts – and rising inflation – under Powell’s successor.
Stability of the global financial system at risk
But there is much more at stake than the well-being of the world’s largest economy. Because the Fed is a special central bank with a special responsibility: the dollar is the world reserve currency, US government bonds are considered “safe havens”.
However, investor confidence in the dollar and US government bonds is not a law of nature. Trump risks a plunge in the dollar and a rise in long-term bond yields with his repeated attacks on the Fed’s independence. So it’s about nothing less than the stability of the global financial system.
Especially since only an effective and independent Fed can fulfill its role as lender of last resort in the event of a crisis. The financial crisis of 2008 recently showed how important this is.
