The true impact of Trump's involvement in Fed decisions

By Sebastian Mullins, Head of fixed income and multi-asset at Schroders in Australia

As analysts put the debt-to-GDP ratio of the US at 200% by 2050, conversations around the independence of the US Federal Reserve (the Fed), and Trump’s interference in central bank matters are increasing, and this could have knock-on implications for markets and investors.

Tension between current Fed Chair Jerome Powell and President Trump have been well documented, as Powell has attempted to maintain central bank independence and resist political pressure around rate decisions. Powell will step down as Chair in May this year, and we believe Trump will ensure that he is replaced by Arthur Burns, who is likely to be more sympathetic toward the Trump administration’s call for rate cuts.

One of the things we look for to confirm our view that inflation is going to be more sticky over the medium-term, is whether central banks are focusing on their employment objective over their inflation objective. The Fed, in particular, has cut rates because jobs data looked weak, but inflation was above target. So, although US unemployment rates have not risen dramatically, rates are already being cut, perhaps unnecessarily.

Notwithstanding this, central banks are not a one-man show. Powell, although no longer chair after his tenure ends in May this year, will still be a member of the Fed committee. There is a robust precedent in US history where a previous chair has remained on the committee and has advised against rate cuts.

But, Trump’s subpoena of Powell is a concern. This is an indication that the administration is applying pressure to get the outgoing Chair to walk away altogether, instead of remaining on the board.

While the decisions of the Fed do not rest solely with the Chair, a number of the current board members are also coming up for re-election. So, there could be a wholesale change of most of the board, which could be a concern. It will really depend on who is elected as the next Chair, and what the composition of the board looks like after that.

While we will watch this closely, it also underscores the heightened level of geopolitical volatility at the moment, and the need for investors to stay active, nimble and to consider opportunities outside of – and less correlated – with the US.