US central bank immunity from political interference is a myth

Matein Khalid

One thing is certain. Both Donald Trump and Joe Biden are not happy campers now that the yield on the 10-year US T-note, the single security most sensitive to expectation of shifts in Fed monetary policy, has jumped above 5%. This means that the bond market expects no FOMC rate cut tonight and for Chairman Powell to reiterate his current “higher for longer” interest rate posture. So it is no coincidence that Wall Street is on edge, men are men and the sheep are nervous.

It is a myth that the US central bank is guaranteed immunity from political interference. Trump used to publicly attack and lampoon Chairman Powell for not cutting rates at the level he wanted. Biden and Yellen are far too sophisticated to indulge in such boorish pressure but have made no secret of the fact that they expect rate cuts this autumn as the race for the White House reaches its climax. If Trump wins, Fed political independence becomes a joke and Powell will lose his head. If Biden wins, expect the US Treasury Secretary to react to his request for higher interest rates by opting for intervention to nudge King Dollar lower, a de facto loosening of Powell’s tight money policies. Anyhow, this is a formula for a rise in capital markets volatility, my rationale to exit yen funded carry trades.

Trump’s willingness to cross red-lines and sacred taboos in the rules of the international finance game could thus coincide with a major sell-off in the bond market and the dollar since there is no doubt that his mercantile mindset that he will fire Powell, force Treasury intervention in the FX market to pressure the US dollar down and slap broader tariffs on US imports could well be the catalyst for the next major global risk-off event. If the Fed loses its credibility as the world’s protector against the inflation virus at a time when it has nowhere near met its dual mandate level, investors can kiss goodbye to the current risk premia in the bond market. I doubt if even Trump can precipitate the next Turkey or Lebanon with his attacks on Fed’s political independence but never say never in the United States of Amnesia.

Deliberate dollar debasement, currency wars with America’s major trading partners, tariffs that increase the price of imports and thus inflation, and another 4-years of chaos and mismanagement in the White House only reinforces my conviction that interest rates are headed a lot higher.

It is surreal to see the biggest anti-war protest since the Vietnam War on Ivy League campuses, intifada-meets-Woodstock. Where was the outrage of liberal America’s offspring when the Assad regime butchered 600,000 people in Syria and Obama sleepwalked in the Oval Office and Russia, Hezbollah and Iran snuffed out the revolt at a horrific human cost. This was the same Kremlin that is now going to be Trump’s BFF if he wins the election. It is ironic that the Gaza war protests are now an election threat to both conservative and progressive members of the American Congress. Sad but true!

Also published on Medium.