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Look at Turkey if you want to know why markets hate the idea of Trump messing with the Fed
Investors have been dismayed by Donald Trump's attacks Fed chief Jerome Powell this year.
The idea is seen as destabilizing for markets, which rely on the faith that the central bank will act based on its own observations about the economy rather than bend to political pressure.
Earlier this week, analysts at Deutsche Bank said the possibility that Trump fires Powell before his term is up in 2026 is the most underappreciated risk in the market right now, likely to spark big sell-offs in bonds and the dollar.
Others have since echoed that.
"I also think that a firing would be the worst, but even a resignation that the market thought that he could be cajoled into giving up early, there would be a negative market reaction both in equity and fixed income." Edward Mills, managing director and Washington policy analyst at Raymond James, told Business Insider.
To understand the wider implications of political meddling with central bank policy, there's an ongoing example to point to: Turkey.
The country has seen astronomical inflation over the last few years, reaching as high as 85% in 2022. Inflationary pressures have since dropped, but consumer prices in Turkey are still up by about 35% over the last year.
Turkey's president, Recep Tayyip Erdoğan, moved to take control of the Central Bank of the Republic of Turkey in 2018. He has since fired five of the bank's leaders—all of whom he appointed—and has generally called for keeping interest rates low, though the bank went on a hiking spree in 2023, raising rates from 8.5% as high as 50%.
Today, the country's benchmark short-term lending rate is 45%.
Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, said that while it's unlikely the US would see inflation at levels similar to Turkey, the situation should be a warning to the administration that Fed independence is important.
"I certainly think there are lessons to be learned there that the administration should be aware of," Pappalardo said. "Perhaps somebody should be reminding President Trump of the direction things can go should he overpower Powell or the Fed or the checks and balances."
In addition to Turkey, there are a couple of other examples monetary policy gone wrong that are cautionary tales for the Trump administration, said Lukasz Tomicki, founder and managing partner at LRT Capital Management.
"Turkey, Argentina (until the most recent administration) and Venezuela are poignant examples of what happens when the central bank is subordinated to the executive," he said in an email.
"Without the restraints of a politically independent central bank, politicians will always run substantial deficits. Once deficits become chronic, central banks are usually called in to buy unlimited amounts of government bonds, which inevitably leads to high and accelerating inflation."...
The idea is seen as destabilizing for markets, which rely on the faith that the central bank will act based on its own observations about the economy rather than bend to political pressure.
Earlier this week, analysts at Deutsche Bank said the possibility that Trump fires Powell before his term is up in 2026 is the most underappreciated risk in the market right now, likely to spark big sell-offs in bonds and the dollar.
Others have since echoed that.
"I also think that a firing would be the worst, but even a resignation that the market thought that he could be cajoled into giving up early, there would be a negative market reaction both in equity and fixed income." Edward Mills, managing director and Washington policy analyst at Raymond James, told Business Insider.
To understand the wider implications of political meddling with central bank policy, there's an ongoing example to point to: Turkey.
The country has seen astronomical inflation over the last few years, reaching as high as 85% in 2022. Inflationary pressures have since dropped, but consumer prices in Turkey are still up by about 35% over the last year.
Turkey's president, Recep Tayyip Erdoğan, moved to take control of the Central Bank of the Republic of Turkey in 2018. He has since fired five of the bank's leaders—all of whom he appointed—and has generally called for keeping interest rates low, though the bank went on a hiking spree in 2023, raising rates from 8.5% as high as 50%.
Today, the country's benchmark short-term lending rate is 45%.
Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, said that while it's unlikely the US would see inflation at levels similar to Turkey, the situation should be a warning to the administration that Fed independence is important.
"I certainly think there are lessons to be learned there that the administration should be aware of," Pappalardo said. "Perhaps somebody should be reminding President Trump of the direction things can go should he overpower Powell or the Fed or the checks and balances."
In addition to Turkey, there are a couple of other examples monetary policy gone wrong that are cautionary tales for the Trump administration, said Lukasz Tomicki, founder and managing partner at LRT Capital Management.
"Turkey, Argentina (until the most recent administration) and Venezuela are poignant examples of what happens when the central bank is subordinated to the executive," he said in an email.
"Without the restraints of a politically independent central bank, politicians will always run substantial deficits. Once deficits become chronic, central banks are usually called in to buy unlimited amounts of government bonds, which inevitably leads to high and accelerating inflation."...
https://www.msn.com/en-us/money/markets/look-at-turkey-if-you-want-to-know-why-markets-hate-the-idea-of-trump-messing-with-the-fed/ar-AA1IQcHd?ocid=msedgntp&pc=HCTS&cvid=19db494e12554e6ddce1afbe3a55d52b&ei=18
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