Trump is set to put the blowtorch to an old enemy

Later this week, the US Federal Reserve Board chair, Jerome Powell, is likely to find himself in Donald Trump’s crosshairs, yet again, with the Fed expected to keep US rates on hold while it waits to see the impact of the president’s barrage of new policies.

The Fed’s Open Market Committee meets on Tuesday and Wednesday. Futures markets are signalling a pause after the US central bank’s three rate cuts at successive meetings late last year.

Trump has wasted no time setting his sights on Jerome Powell. Credit: AP

Those markets are pricing in only two rate cuts, at most, this year, in line with the Federal Open Market Committee members’ most recent projections but more than many market analysts expect. Some investment bank economists are even predicting rate hikes because of the potential inflationary effects of the Trump policy agenda.

Trump wants lower interest rates and, as he did during his first term, and has been disparaging about the Fed, its chair and its monetary policies.

“I think I know interest rates much better than they do, and I think I know it certainly better than the one who’s primarily in charge of making that decision,” Trump said last Thursday, in an obvious reference to Powell. “If I disagree [with Fed decisions], I will let it be known.”

Trump also said he planned to speak to Powell “at the right time” and that the Fed would listen to him.

Another confrontation with Trump (his first term was studded with attacks on Powell and the Fed) might be deferred until the next Open Market Committee meeting in March, which will contain the latest set of economic projections. If the projections reflect an expectation of only two small rate cuts this year, Trump will be most unhappy, and it will be Powell who will cop the brunt of his displeasure.

There’s not much Trump can do other than belittle Powell and his colleagues. During his first term, he explored ways to sack the Fed chair but discovered he didn’t have the legal authority to do it, and Powell has made it clear that he will resist any pressure to resign.

His term as chair ends in May next year, but he will remain a Fed governor until 2028 and it is possible that he could remain chair of the Federal Open Market Committee, which actually sets US monetary policy, because it is the members of that committee, not the White House, that appoint their leader.

Fed chief Jerome Powell has been a target of Donald Trump for years. Credit: AP

There’s only one other Fed governor whose term expires during the second Trump presidency, Adriana Kugler, so Trump won’t be able to remake either the Fed’s board or the larger committee.

Last Thursday, during a video address to the World Economic Forum in Davos, Switzerland, Trump linked his call for lower US interest rates to oil prices.

He said he would ask Saudi Arabia and OPEC to bring down the cost of oil.

“With oil prices going down, I’ll demand that interest rates drop immediately,” he said.

Within the blizzard of executive orders Trump issued on his first day in office last week was a declaration of an energy emergency in the US.

That’s despite the fact US energy production was at record levels last year and that there is a global glut of oil, with production exceeding demand by about a million barrels a day and the oil prices trading below $US80 a barrel.

According to the US Energy Information Administration, oil is likely to trade around $US74 ($117) a barrel this year and below $US70 a barrel in 2026 as non-OPEC production continues to increase.

The United States produced a record 13.22 million barrels of oil a day last year and is expected to produce more than 13.5 million barrels a day this year. During the final year of Trump’s last term, it produced 11.3 million barrels a day.

Why would the Saudis, who have borne the brunt of the “voluntary” cuts to OPEC+ production of about 6 million barrels a day over the past three years as the cartel has sought to put a floor under oil prices, agree to act to lower prices even further? They want higher, not lower, prices to balance their budgets.

Trump is also overstating the role that oil prices are playing in America’s inflation rates. After peaking just above $US5 a gallon in mid-2022, petrol prices have since fallen to a touch over $US3 a gallon.

If food and energy prices are excluded from US inflation data to produce the “core” number that central banks tend to focus on, the US core inflation rate of 3.2 per cent at the end of last year was higher than the headline rate of 2.9 per cent – energy prices were detracting from inflation, not adding to it, and lowering them further will do little to impact the other, more stubborn, influences on inflation.

The range of “other” influences is likely to broaden.

Trump has said he will impose 25 per cent tariffs on Canada and Mexico from February 1 for their claimed role in facilitating illegal immigration and fentanyl imports to the US, as well as a new additional 10 per cent tariff of imports from China because of its links to fentanyl production.

He’s also just slapped a 25 per cent tariff on Colombia over its refusal to accept flights of deported undocumented immigrants.

Trump’s push for lower oil prices is set to fall on deaf ears.Credit: AP

His more central trade policies – the threatened “baseline” tariff of 10 to 20 per cent on all imports to the US and 60 per cent on all imports from China – weren’t in the executive orders issued last week, despite Trump’s campaign promise that they would be in place from day one of his presidency.

Instead, he has ordered a comprehensive review of America’s trade relationships by April 1. No one doubts that there will be more, and more substantive, action on trade and more use of his weapon of first resort – tariffs – once that review has been completed.

Tariffs, by raising the cost of imports, are inflationary. They are a tax on consumption, paid for by the importer and passed on in part or in full to consumers via higher prices.

Trump’s immigration policies, which involve the deportation of potentially millions of undocumented immigrants, by shrinking the pool of low-cost labour in the US, would also be inflationary.

‘If I disagree [with Fed decisions], I will let it be known.’

Donald Trump, president

Last week, when investors saw that the big and broad-based tariffs that Trump had promised to impose had been deferred, bond yields, which had been surging since Trump’s victory in the November election even as the Fed was cutting its policy rate, fell back.

That is a demonstration of the sensitivity of US rates to Trump’s trade policies. It also shows that while the federal funds rate (akin to the Reserve Bank’s cash rate) is influential, bond market investors have the ability to price credit independently.

Even if the Fed were coerced into cutting rates by Trump (which is unlikely, given that its independence from politics and politicians is central to its credibility), bond investors – taking into account the implications of Trump’s policies, and America’s record levels of deficits and debt – would come to their own conclusions about the economic impacts and risks of his policies.

Those bond investors who influence the rate Americans actually pay to borrow would be even less likely to take any notice of Trump’s demands for lower interest rates than the Fed.

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