Opinion Firing at US Fed, turmoil in markets

The US Federal Reserve is in an unenviable position, confronted with challenges on both its mandates — ensuring price stability and maximum employment. President Donald Trump’s tariff policies have raised the spectre of higher inflation, along with weaker economic momentum and higher unemployment at the same time. This complicates the Fed’s monetary policy decisions — Fed chair Jerome Powell has also acknowledged that. On Wednesday, speaking at the Economic Club of Chicago, he said, “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.” Powell further said that the “effects of that (the Trump administration’s policy changes) are likely to move us away from our goals, so unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way” into the economy.

A day later, the Fed chairperson came under severe criticism from the US President. On Thursday, Trump wrote on a social media platform: “‘Too Late’ Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!’… Powell’s termination cannot come fast enough!” This is not the first time that Trump has criticised the Fed. In March, when the central bank had decided to hold rates steady, Trump had posted: “The Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy. Do the right thing.” The threat of “Powell’s termination” because of disagreements with the President sends worrying signals about the independence of the US Fed. Central bank independence is a cherished asset. Unlike politicians who tend to be driven by short-term political considerations, independent central banks, taking a longer view, can take tough and unpopular decisions that may deliver short-term pain. Former US Fed chairperson Ben Bernanke had once cautioned that “political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation”.

Advertisement

These developments come at a time of uncertainty in markets. US treasuries — considered to be a safe haven during periods of uncertainty — had sold off recently. Alongside, the US dollar has weakened. On Monday, former US treasury secretary Janet Yellen said that the movement in the bond market was “suggestive of a loss of confidence in US economic policy”. Any attempt to undermine the independence of the central bank will only add to the uncertainty and turmoil in the markets and the economy.