Central bank power feud escalates under Trump administration, causing stock market turbulence
In a developing saga, the escalating power struggle between US President Donald Trump and the Federal Reserve (Fed) is causing turbulence in the financial markets.
The latest chapter unfolded this week, with President Trump writing that there are sufficient grounds to believe that Fed Governor Lisa Cook made false statements in one or more mortgage contracts. This announcement led to a series of events that have raised concerns over the Fed's autonomy.
Trump's public criticism of Fed Chair Jerome Powell, who he has dubbed "Mr. Late" and a "stubborn fool," has been ongoing for months. His demands for lower interest rates have fallen on deaf ears, leading to his recent decision to dismiss Governor Cook. However, whether a US president can remove the head of the Fed is not legally clear, and a president can only dismiss central bank governors if there are sufficient grounds.
Cook's law firm has stated that she intends to fight for her position, as no legally valid reasons exist for her dismissal, and Trump has no authority to do so. This move has sparked worries among investors about the independence of the central bank around President Powell.
The announcement of Cook's dismissal led to a fall in stock markets, with investors seeking safe havens like gold. The price of a troy ounce of gold in London jumped almost $40 overnight and reached around $3,386. In the morning, gold cost $3,376 per troy ounce, approaching the record from April of $3,500 per ounce.
The political pressure from President Trump on the Fed's independence stems from his frustration over the Fed's refusal to lower interest rates. This refusal has led Trump to publicly criticize Powell and intervene directly by dismissing Fed Governor Cook, which raises concerns that Trump aims to undermine the Fed's autonomy to influence monetary policy for his administration’s economic agenda.
Last week, Powell signaled interest rate cuts, citing weakness in the US labor market. Economists warn that interest rate cuts could fuel inflation. An interest rate cut now seems possible in September, following months of the interest rate in the USA being in the range of 4.25 to 4.5 percent.
The turmoil in the financial markets is not limited to the US. The German leading index Dax fell by around 0.5 percent in the morning, as did the MDax and the Eurozone index Eurostoxx 50. Trump's attacks on the Fed have contributed to a loss of trust in US financial markets, which is starting to be felt globally.
As the power struggle between Trump and the Fed continues, the future of monetary policy and the stability of financial markets remains uncertain.
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