Trump's Fed Interference Sparks Inflation Fears, Market Turmoil

The independence of the Federal Reserve is facing unprecedented challenges, with dark currents of market turmoil surging beneath the surface. The recent events surrounding the Federal Reserve's independence have sparked significant controversy and raised concerns about the potential impact on the U.S. economy and global markets.

On September 16, the White House announced that the Trump administration would appeal the court's decision to block the removal of Federal Reserve Governor Lisa Cook. Earlier, a U.S. federal appeals court ruled to prevent President Trump from dismissing Cook before the Federal Reserve's policy meeting. Meanwhile, Stephen Miller, nominated by Trump, was sworn in as a Federal Reserve governor on the same day and quickly participated in the September rate decision. Miller and Cook sat at the same table during the meeting, separated by only one other governor.

Looking ahead to next year, Federal Reserve Chairman Jerome Powell's term will end, and Trump will have the opportunity to nominate a new chairman, potentially exerting greater influence over the Federal Reserve. The chief economist of Dongwu Securities noted that while the Federal Reserve chairman has only one vote in the FOMC, their role as a central figure in setting the agenda and guiding discussions, as well as communicating with the public, can significantly influence the overall direction of monetary policy. Given that Powell's term expires in May 2026, nominating a more dovish candidate has become Trump's most direct means of interfering with the Federal Reserve's independence.

The controversy surrounding the dismissal of Cook has highlighted the broader challenges to the Federal Reserve's independence. The attempt to remove Cook has raised questions about whether the U.S. government can dismiss high-level Federal Reserve officials due to policy disagreements or unproven allegations, sparking significant debate. Analysts have pointed out that historically, this attempt to directly dismiss a governor marks a significant milestone in the challenge to the Federal Reserve's independence. The core issues revolve around procedural and evidentiary challenges. Trump's actions face legal hurdles, and the allegations against Cook have not been verified by a court.

Trump's interference with the Federal Reserve has also raised concerns about inflation risks. The chief economist of Dongwu Securities warned that while U.S. inflation has been declining after the pandemic, it has recently started to rise again. The uncertainty surrounding tariff policies poses a risk of a second round of inflation. If the new Federal Reserve governors align with Trump's policies and maintain loose monetary conditions, the U.S. could face a repeat of the stagflation of the 1970s. As the second phase of the "reciprocal tariffs" policy and actual interest rate levels become clearer, their impact on microeconomic prices may just be beginning to emerge. If the traditional economic tool of monetary policy is compromised due to the Federal Reserve's weakened independence, it could exacerbate the risk of the U.S. economy entering a period of renewed inflation.

The potential consequences of these actions are far-reaching. The founder and CEO of Citadel, a major hedge fund, noted that uncontrolled inflation during the Biden administration led to significant losses for the Democratic Party in the 2024 elections. Trump and his administration have made controlling inflation a priority, with lower inflation naturally leading to lower interest rates. However, statements and actions that undermine the Federal Reserve's independence could exacerbate inflation and long-term interest rate increases.

Public criticism of the Federal Reserve by the U.S. president, suggestions to dismiss governors, and pressure on the central bank to adopt a more accommodative stance on inflation have been described as costly strategies. These actions have raised inflation expectations, increased market risk premiums, and eroded investor confidence in U.S. institutions. The chief economist of Dongwu Securities noted that Trump's interference with the Federal Reserve's independence is not limited to rate cut expectations but also affects the credibility of the dollar system. The Federal Reserve's inflation target of 2% has anchored long-term inflation expectations, and its independence has ensured the predictability of the interest rate path. However, if Trump attempts to artificially lower interest rates for political reasons, market expectations of "excessive rate cuts" could drive down 2-year Treasury yields, while the uncertainty surrounding future monetary policy could erode investor confidence in dollar assets.

Investors may demand higher risk premiums for U.S. Treasuries, limiting the downside for 10-year yields. Additionally, concerns about the sustainability of U.S. fiscal policy and the independence of monetary policy could lead to a broader de-dollarization trend, further weakening the dollar. The recent surge in gold prices, breaking through $3,700 per ounce, reflects the benefits of global portfolio diversification, particularly in precious metals. This trend suggests that commodity markets, especially precious metals, are worth continued attention. The broader impact of these developments on the dollar's reserve currency status and the credibility of U.S. institutions remains a concern.