Trump’s push to oust Powell triggers market fears of inflation

President Donald Trump has reignited efforts to remove Federal Reserve Chair Jerome Powell, triggering fresh anxiety across financial markets.

The renewed push has raised fears that political interference at the US central bank could spark long-term inflation and disrupt the economy.

President Trump has consistently lashed out at Powell for not cutting rates repeatedly since he returned to the White House in January. His recent comments have gone even further, suggesting that Powell should step down and suggesting that he has acted to sabotage the US economy by keeping interest rates too high.

Trump said that Powell’s resignation “would be a great thing” as he expressed frustration with the Fed’s refusal to lower rates, even as signals of weakening global growth are picking up. 

And while the president does not have the legal power to remove the Fed chair over policy disputes, his aggressive public pressure campaign has prompted speculation about a more sustained effort to meddle with the traditionally independent institution.

Trump’s repeated attacks have undermined investor confidence and left many worried that a politicized Fed might lose the resolve to fight inflation in favor of providing a temporary economic boost.

Markets hedge against inflation fears

The financial markets have answered with one clear statement: investors are bracing for higher inflation.

The yield on longer-dated US Treasury bonds has risen, indicating expectations that future interest rates will rise as inflation starts to creep up. However, analysts caution that if Trump persuades the central bank to cut rates too soon, it could trigger an overheating economy.

“If markets believe that a politically-captured Fed will lower rates to stimulate growth regardless of economic consequences, long-term inflation expectations will rise, causing the curve to steepen,” said Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management. It was difficult to predict the exact scale of the market reaction. Still, he believed the move could be significant, measured in percentage-point increases in 30-year Treasury yields rather than basis points.

A steepening yield curve is of particular concern to homeowners and businesses when long-term borrowing costs rise more rapidly than short-term borrowing. Rising rates on 30-year mortgages, car loans, and corporate bonds would raise borrowing costs, crimp household budgets, and squeeze corporate profits.

The dollar has also begun to wobble. The greenback fell against most other major currencies as investors anticipated looser monetary policy. Looser money tends to weaken the dollar, making imports more expensive, which throws fuel onto the fire of inflationary pressures that Trump’s trade tariffs have lit.

Wall Street economists rise to the defense of Fed independence

The reaction on Wall Street and across the broader business community to Trump’s campaign has been swift. JPMorgan Chase CEO Jamie Dimon issued a strong warning, emphasizing that central bank independence is essential for economic stability. During a Tuesday investor call, he cautioned that undermining this independence could lead to serious, unintended consequences.

Other economists agree. Most say that the Feds’ credibility lies in their ability to act without being swayed by political pressure. Suppose the markets believe that the Fed is caving to the White House. In that case, the potential for volatility is not limited to bonds, but could ripple through stocks, commodities, and various global currencies.

Minutes of the Fed’s June 17–18 meeting, released last week, provided little support for a rate cut when the central bank meets next on July 29–30. Most policymakers were concerned about inflationary risks, specifically the inflationary risks posed by Trump’s protectionist trade policies. And with tariffs still in effect on tens of billions of dollars’ worth of goods, inflation pressures are already simmering.

However, instead of heeding the warnings, Trump and his aides have doubled down. In recent weeks, top officials have gone on financial news programs and social media, repeating calls for lower interest rates and saying Powell should resign if he won’t bend.

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