Intel stock spikes after report of possible US government stake
Investing.com - The Federal Reserve’s independence has yet to become a concern for investors despite a recent move by President Donald Trump to pressure the central bank to rapidly slash interest rates, according to analysts at Capital Economics.
Trump has especially hit out at Fed Chair Jerome Powell, who has continued to advocate for a more cautious approach to rate reductions as policymakers gauge the impact of the sweeping U.S. tariffs on inflation and overall economic activity.
Media reports have suggested that an exasperated Trump has even been toying with the idea of naming Powell’s replacement in September or October, possibly creating a "shadow" central bank leader during the final months of Powell’s tenure.
Expectations that Trump will pick a more dovish successor to Powell have dented an already beleaguered U.S. dollar, with the greenback hovering around a 3-1/2-year low on Friday.
Still, although the dollar has tumbled as Trump’s pressure has ratched up, "it would be wrong [...] to think" that this would mean that investors are dumping U.S. assets in response, the Capital Economics analysts said in a note.
"For one, the prices of those assets have generally rallied," they flagged, adding that a recent slide in U.S. Treasury yields in particular may have especially contributed to the dollar’s weakness. Bond prices and yield tend to move inversely.
"That suggests to us that if Trump’s attacks on the Fed are behind the dollar’s recent fall, it’s simply because investors think they might be successful and encourage the Fed to bring forward cuts," the analysts said.
However, they warned that "clear risks" remain, adding that, should Trump persuade the Fed to lower rates by more than money markets now imply, "it might bring subsequent hikes back on the table in order to contain any resultant inflation."
"[T]he much greater risk is that threats to the Fed’s independence put upward pressure on term premia, which would surely also pile further pressure on the greenback," the analysts said, referring to the extra returns investors demand for holding long-dated rather than shorter-term bonds.