As the US economy faces a complex mix of signals, with slowing momentum but still decent headline growth, the Trump administration’s ongoing efforts to undermine the independence of the Federal Reserve have come under intense scrutiny. Federal Reserve Chair Jerome Powell has issued a stark warning, stating that a criminal investigation into the central bank’s headquarters renovation is an attempt to bully officials into setting policy based on political pressure rather than economic conditions.
This confrontation represents a perilous moment for the US, where the principle of an independent central bank free from political interference is being tested. Trump has previously lashed out at Powell, dubbing him a “stubborn mule” for not cutting interest rates faster. Now, with the Department of Justice reportedly opening an investigation into the Fed chair, the stakes have been raised significantly.
Experts warn that any erosion of the Fed’s independence could have severe consequences, including a potential surge in inflation and a significant decline in the value of the dollar. Owners of US assets and bonds would likely grow increasingly concerned about the central bank’s ability to anchor inflation expectations, leading to higher long-term borrowing costs for businesses and consumers.
The sanguine reaction from financial markets so far may be premised on the belief that this affair could fizzle out, as the alleged wrongdoing related to the Fed’s headquarters renovation hardly seems substantial enough to warrant criminal charges. Additionally, Powell’s term is set to end in May, and the current Fed committee is responsible for setting interest rates, not the chair alone.
However, the broader threat to the Fed’s independence remains. As the US grapples with a substantial fiscal deficit and mixed economic signals, the need for a central bank that can make decisions based on evidence and economic conditions, rather than political pressure, is paramount. Failure to protect the Fed’s autonomy could have far-reaching and self-defeating consequences for the US economy.
The question remains whether President Trump fully recognizes the potential backlash from undermining the Federal Reserve. For now, markets seem to cling to the idea that he will not push things too far, but this assumption remains untested. A pre-emptive revolt in the US bond market would be a clear signal that the integrity of the Fed must be safeguarded.
