Macroscope | Trump’s crusade against the Fed turning US into an emerging market

If US President Donald Trump had his way, the Federal Reserve’s benchmark interest rate would stand at 1 per cent instead of the current level of between 4.25 and 4.5 per cent. In a handwritten note to Fed chair Jerome Powell on June 30, Trump renewed his attack on the head of the world’s most important central bank, accusing Powell of costing the country “a fortune” by refusing to reduce borrowing costs more aggressively.

Never mind that both of these countries are currently experiencing deflation. That is compared with an annual inflation rate last month of 2.7 per cent in the US, slightly higher than in May amid signs higher trade tariffs are starting to push up prices.

Trump does not care about the intricacies of data points. His only concern is that the Fed loosens monetary policy as quickly and as sharply as possible to help stimulate growth and lower debt-servicing costs. While the president has denied he intends to fire Powell, whose term as Fed chair expires in May 2026, he is doing his utmost to hound him out of office in one of the fiercest attacks on the independence of the US central bank.

Financial markets have largely given Trump a free pass since he returned to the White House. With the exception of a brief period of intense selling pressure in bond and equity markets in early April following Trump’s announcement of sweeping “reciprocal” tariffs on nearly all US trading partners – the sell-off gave way to a dramatic rally after Trump suspended the levies – investors have downplayed the damage wrought by Trump’s assault on domestic and international institutions and norms.

While many analysts point to the Taco trade – an investment strategy based on expectations that “Trump always chickens out”, especially when it comes to tariffs – the reality is that markets have never really challenged Trump. The S&P 500 equity index stands at a record high while the yield on the 10-year Treasury bond is at 4.5 per cent, down from 4.8 per cent just before Trump began his second term.