Just as US stock markets have recovered from the dramatic losses caused by Donald Trump’s erratic tariff policies this year, the US President seems determined to lob another grenade at Wall Street and the already-weakened dollar.
He wants to dismiss Federal Reserve governor Lisa Cook, supposedly over claims of mortgage fraud, even before any finding of wrongdoing. But it appears that the real motivation for the move is Mr Trump’s determination to force the central bank to bend to his will.
Since returning to office in January, Mr Trump has been driven to distraction by the Fed’s wait-and-see approach to cutting interest rates. He has assailed Fed chair Jerome Powell in a series of bitter and personal attacks, calling him a “stubborn moron” and a “disaster” for refusing to enact an aggressive series of rate cuts.
Mr Trump is desperate for the Fed to slash interest rates (currently at about 4.33 per cent) by more than 3 per cent as a way of boosting economic activity, stock markets and the property market, apparently ignoring the costly lessons of the post-pandemic inflationary cycle that led to today's high interest rates in the first place.
Inflation is already rising again, thanks in part to the Trump-imposed extra costs on imported goods, with products from most countries now subject to high tariffs. Rightly, the Fed wants to further assess how Mr Trump’s tariffs and immigration clampdown are affecting the economy before it makes more cuts.
US stock market reaction was largely muted on Tuesday, the day after Mr Trump said he would fire Ms Cook, with major indices drifting up. One reason is that Ms Cook has said she has no intention of stepping down, meaning that her tenure at the Fed looks likely to be decided by the Supreme Court, which in May suggested that a president has no authority to dismiss members of the quasi-private Fed.
But things could very quickly sour, and anyone invested in the markets this year knows how fast indices can go from green to red. If Ms Cook is ultimately fired, Mr Trump will appoint her successor, meaning most of the Fed's 12-member committee that sets interest rates will have been appointed by the President. He is assuming that the Federal Open Market Committee will then do his bidding and embark on a gung-ho series of rate cuts.
Such a loss of independence for the central bank could prove disastrous. Trust takes a long time to establish but it is easily broken. Global markets have long trusted the Fed because it has stood outside the political fray. Remove that cornerstone and the economy will suffer.
Another consequence of Mr Trump’s shenanigans at the Fed could be a further weakening of the dollar, something the President says would be good for the US economy by making tourism and exports cheaper.
“You make a hell of a lot more money” with a weaker dollar, he said last month. I doubt that will be very reassuring for people who spend their money overseas, those who rely on imports, or for those countries with currencies pegged to the dollar. Already, the euro is rising in anticipation of further US rate cuts by a more pliant Fed.
Mr Trump's move against Ms Cook comes less than a month after he fired Commissioner of Labour Statistics Erika McEntarfer after the July jobs report put employment growth at a much lower level than expected. The numbers weren't to Mr Trump's liking, so he accused her of faking them. Her dismissal will only serve to cast further doubt on the credibility of America's long-established financial institutions.
It will be interesting to see who Mr Trump blames if his attempt to bulldoze his way into the Federal Reserve backfires and starts a flight from the greenback and US equities.
