However much the administration might like to claim that the subpoenas sent to the Fed were unconnected to the president’s unhappiness with the central bank’s interest rate policy, it is not likely to be believed in financial markets. And in financial markets, perception counts for a great deal.
As I noted in a post shortly after Fed Chairman Powell released his public response to the DOJ’s actions:
The problem with attacking the Fed’s independence (or even to be perceived as attacking the Fed’s independence) is that it increases investors’ concern about the degree to which the value of the money they lend the U.S. (through buying treasuries) will be eaten away by inflation. All other things being equal (and in the case of treasuries, traditionally seen as a safe haven, all other things are often not equal), that ought to mean that the price that bond buyers charge for their money the interest rate — should rise. If that becomes the case in the U.S., political pressure on the Fed will, over time, be self-defeating.
At the time I wrote that, the prices of gold and silver were rising, and the dollar (as measured by the DXY index) was falling.
Short-term movements in the markets can easily go into reverse. Nevertheless, two days later, how are things going?
Gold is still trading at around $4,600, up from $4,520 (another notch up after a long run) and silver is off recent peaks, but at around $87, quite a bit higher than its “pre-Powell” level of $80 or so. The yields on ten-year treasuries (one rough-and-ready indicator of inflationary expectations) are also still higher than “before” (roughly 4.17 vs 4.14), but also off their most recent peaks. The dollar, however, has recovered its losses.
Meanwhile, a number of bankers have joined those warning that the move could be counterproductive, among them JPMorganChase’s Jamie Dimon. In his view, anything that “chips away” at the Fed’s independence would “raise inflation expectations and probably increase rates over time,” and he was not alone in saying so.
The move against Powell may well complicate efforts to pick his successor. Thom Tillis, a Republican member of the Senate Banking Committee, has, the New York Times reports, vowed “to block confirmation of Trump’s Fed nominees until the Powell legal matter has been resolved.” Tillis has been backed by Lisa Murkowski, and the unease in the GOP ranks does not appear to be confined to those two. On top of that, it is obvious that forthcoming hearings for any Fed nominee will be heavily focused on the central bank’s independence, something that the administration is unlikely to welcome. The chances that Powell might serve out the rest of his term on the Fed’s board (as he is entitled to do even after the expiry of his term as chairman) must surely have increased. His board term does not expire until January 2028.
Meanwhile various sources have reported that Treasury Secretary Scott Bessent is not happy with the DOJ’s investigation into Powell. Given that Bessent understands the bond markets very well, that would be unsurprising.
However, a Treasury spokesperson told ABC News that “there is zero daylight between Secretary Bessent and President Trump, and the ‘sources’ in this story do not speak for the Secretary.”
So there’s that.