Trump’s chaotic term in the White House is causing rattling everyone, including the Federal Reserve. Whilst Jay Powell counts down his final days in office, Trump has stepped up his attack on the Federal team, threatening its independence.
Why is independence important in central banks?
Independence is important because it free central banks from politics. Imagine Trump in control – he is the type of person to cut rates to 0%, just to juice growth
The main objective of the central bank is maintaining price and financial stability. It is critical for the central bank to remain credible to the public so that the public can take heed on what their views.
What you need to take from this?
Threatening independence can create distrust within the public. Avoiding a 2008 financial crisis is essential. If the public starts to distrust the central bank, it can create a snowball effect which can lead to high unemployment and financial instability. Interest rates and quantitative easing will stop working – making the central bank as an organisation ineffective.
Furthermore, quick action in response to crisis may not be taken if it is not approved by the political party.
What to look for?
In the coming weeks, Trump will likely swap Federal official for loyalist. It will be important to highlight how loyal they are to Trump – which can cause significant volatility in both the indices and bonds market.
For the households and businesses, it will be rare to see any political outburst however the threat to independency is real. Messages from the central bank unlike before will be scrutinised to the extreme and it could mean higher borrowing costs, unstable mortgage rates and financial shocks.
A politicalised Federal Reserve causes financial headache to already struggling global economy.
Econ Oddities 
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