RW Johnson: Trump, the Fed and the Dollar

Key topics:Trump pressures Fed’s Powell to slash interest rates despite inflation risksTariffs spark fears of stagflation, rising consumer costs, and market turmoilUndermining Fed independence could trigger global financial system panic.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.The auditorium doors will open for BNIC#2 on 10 September 2025 in Hermanus. For more information and tickets, click here..By RW Johnson.Listen to this story instead:.Sometimes you can see trouble coming from a long way off. Donald Trump’s continuing anger with Jerome Powell, the chairman of the Federal Reserve Bank, is just such a case. When Powell was first appointed in 2018 during Trump’s first term there was general approval from all sides of the political spectrum. Powell was a well respected lawyer and banker, a Princeton graduate (his undergraduate thesis in 1975 was on “South Africa: Forces for Change”), a moderate Republican who had first been appointed to the Fed’s board of governors by President Obama in 2012. When he was nominated for another term in 2014 he was confirmed by a Senate vote of 67-24, showing that he had considerable bipartisan support. Nonetheless, even during Trump’s first term the President had become increasingly critical of Powell. The point is that anyone who deals in property likes interest rates to be as low as possible. This inflates property values and makes property deals easier, for the whole property world is based on debt. Like any real estate man, Trump has always been in favour of the lowest possible interest rate and there has never been a point where he favoured an increase in interest rates. When Powell first became Fed chairman the US economy was growing fast so Powell raised rates and began a process of “quantitative tightening” in order to tamp down inflationary pressures. Trump was immediately critical and said he was having second thoughts about having nominated Powell. In fact, Powell’s measures had worked and by early 2019 Powell was able to relax his position, causing asset prices to rise. But Trump was already furious, calling the Fed’s policies “insane” and terming Powell “an enemy”. For, like all Presidents running for re-election, Trump wanted a pre-election boom. In fact the emergence of Covid-19 caused Powell to adopt a far more reflationary posture, pumping up the economy to prevent Covid from triggering a recession. Trump was delighted and said he was “very happy” with Powell’s performance which, of course, he mis-interpreted as an act of loyalty, an attempt to ensure Trump’s re-election. In fact Biden won and immediately launched upon a massively reflationary legislative programme. Powell responded by trying to damp down inflationary pressures. In March 2022 the Fed increased the interest rate and by July 2023 had increased rates another ten times, raising the benchmark rate to 5.25%. This caused leftish Democrats like Elizabeth Warren and Alexandria Ocasio-Cortez to campaign against Powell’s re-appointment as chairman, but Biden went ahead and re-appointed him in 2022, with the Senate confirming him by an overwhelming 80-19 vote. .Read more:.Behind the Fed’s move to keep government debt – Bill Dudley.By 2024 Powell was earning plaudits from across the political spectrum. He had successfully avoided the onset of Covid-19 from causing a recession and he had reacted sharply against Biden’s inflationary programme. The Consumer Price Index had peaked at a 9.1% increase and was now coming smartly down but through it all the US economy had continued to grow and unemployment had remained at record low levels, so Powell had ridden the curve both down and up and still achieved the near-miracle of a “soft-landing”. By early 2025 Powell had brought the benchmark rate back down to 4.25% but was holding it there in order to drive inflation back down to 2%, the Fed’s target figure. By May 2025 it was down to 2.4%.However, soon after he was re-elected Trump began to demand that Powell should drop interest rates, although the Fed is strictly independent and the President has no right to influence its decisions. The problem was, of course, that Trump was already promising that virtually every country trading with the US would have to pay greatly increased tariffs. At least, that’s how Trump put it, though the reality is that the tariff is paid by the importer, not the country exporting to the US. Inevitably, the importer will then pass at least part of the extra cost onto the consumer. So, in effect, tariffs are a sales tax on American consumers – and are thus inevitably inflationary. Trump never discusses his tariffs in these terms and instead stresses the tax cuts in his budget. He boasts of the money brought in by tariffs as if this is a wondrous bounty for the US Treasury, brought in from abroad. This is a confidence trick practised in broad daylight but of course the truth cannot be hidden. When Trump first announced his tariffs on “Liberation Day” – April 1, appropriately – the markets dived and there were immediate predictions of an American recession. Trump’s popularity fell in the polls amidst economists widely pointing out that Trump’s assumptions behind the tariffs made no sense. At which point Trump snatched back the tariffs, deferred them all for months and only now is attempting to impose a number of generally lower, though still substantial, tariffs.Meanwhile Trump began attacking Powell in increasingly forthright terms, claiming that he did everything far too late and that he ought to cut interest rates by at least two or three per cent. He used deliberately insulting terms like “knucklehead” and continually hinted that he was tempted to sack Powell. He seemed to be trying to provoke Powell to reply in like manner, but Powell kept his cool, merely insisting that there was no legal provision allowing the President to sack him and that he intended to serve out his term until it ends in May 2026. There was absolutely no precedent for Trump’s behaviour and the president’s demand for a cut of 2-3% was preposterous: typically the Fed makes changes of only 0.25% at a time.Trump’s angry accusation was that Powell’s retention of the 4.25% rate was costing the US a great deal of money. This was true enough in that much of America’s debt was incurred during the period of “quantitative easing” when interest rates were as low as 1% but it was a strange accusation to make for a President whose budget is dramatically increasing that debt. Powell’s rationale is perfectly simple: Trump’s new tariffs are bound to be inflationary and the Fed wants to maintain the downward pressure to prevent inflation getting out of hand again. So Powell is waiting and watching the effect of tariffs. In fact inflation rose in June from 2.4% to 2.7%, confirming Powell’s fears.There is, however, a larger picture. Trump’s presidency is quasi-regal and nothing infuriates Trump so much as Powell’s quiet, dignified defiance. Trump feels that no one in the US government has the right to say No to him and so he keeps returning to the possibility of firing Powell, or of appointing his successor many months early, thus creating a shadow Fed chair to undermine Powell. Each time this happens his financial advisers step forward to warn him that the entire American financial system rests on the guaranteed independence of the Fed and that any attempt to subvert that independence could have catastrophic results. This frightens Trump enough for him to deny that he is planning to sack Powell but Trump’s ego is such that very quickly he reaches boiling point again and starts to threaten Powell anew. For the fact is that the imposition of tariffs has slowed the economy which is definitely trending downwards, with the result, long predicted by Larry Summers, of stagflation. The polls show that 55% disapprove of Trump’s record as president and only 41% approve and they also show a more than 2:1 majority of Americans wanting lower tariffs, not higher ones. If these trends continue Trump will be in serious trouble and his prediction that his “big, beautiful budget” will trigger accelerated growth could fall flat. Given the budget’s unpopularity because of its cuts to Medicaid, Trump can’t afford that. So he wants to supercharge the economy with dramatic interest rate cuts. But Trump’s advisers aren’t joking. US Treasury bonds are the world’s reserve asset and they have historically been seen as risk-free because of the Fed’s guaranteed independence. Already Trump has shaken confidence sufficiently to produce a 10% fall in the value of the dollar but should Trump lose his temper and try to sack Powell there would be a stampede out of US assets and the entire world’s financial system would be shaken. History suggests that there is no stronger force than the “bond vigilantes” who effectively police the market in Treasury bonds.The result has been a steady procession of Republican senators and big businessmen such as Jamie Dimon, the boss of JP Morgan-Chase, warning how disastrous any attempt by Trump to get rid of Powell would be. To Trump’s fury, Rupert Murdoch’s Wall Street Journal has now added its voice. On July 17th an editorial there warned of Powell’s sacking:“Don’t do it.” (Trump has now taken to suggesting that actually Biden chose Powell.) “Love him or loathe Mr Powell, Mr Trump chose him. Mr Trump also chose the tariff taxes, and a multitude of no-growth tax and spending handouts in the new budget bill. Now the President has to live with his choices.” .Read more:.Fed struggles amid unprecedented uncertainty – Jonathan Levin.Trump immediately said it would be “most unlikely” that he would sack Powell – but no one knows how long it will be before his ego and temper push him in the opposite direction again. Moreover, Trump has made it clear that even if he has to wait for Powell’s term to finish he will choose “a low-rates guy” as his successor, clearly meaning someone who will do whatever the White House wants. This is just as dangerous as the firing option, for if the markets sense that the Fed is no longer independent the stampede will begin. In fact, the Fed chairman doesn’t decide rates. Instead they are decided by the Federal Open Market Committee, including representatives of all the twelve Federal regional reserve banks – Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, Kansas City, Dallas and San Francisco. Each such chairman serves a long term and is independent so there is no magic way that a pliable chairman of the Fed can prevail. One of the things for which Jerome Powell is much praised is his genial and democratic way of building consensus. So even if Trump appoints a patsy as Fed chairman, he might still not get his way.Even so, the situation is fraught with danger. If Trump appoints a yes-man, the markets will begin to panic and the situation could rapidly run out of control. A flight from US Treasury bonds could quickly make America’s debt unpayable and could even force a default. But a flight to where or what ? There is no other asset class of comparable size and solidity so trillions of dollars would be desperately searching for another home. And if American bonds are no longer trustworthy, the same will be even truer for shares on Wall Street. It doesn’t bear thinking about – except that this could all happen in less than a year’s time.

RW Johnson: Trump, the Fed and the Dollar

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