Markets seem relatively satisfied with the prospect of Donald Trump enjoying a second term in office as US president, but is it possible they’re failing to properly appraise potential hazards? Ernie Tedeschi from Yale University thinks so. In an article for the Financial Times, he cautions of an escalating “political risk” which may be undervalued by markets.
As an economist attached to the White House Council of Economic Advisers till March, Tedeschi is primarily worried about potential threats to the independence of the Federal Reserve. He suggests, based on predictions at Yale’s Budget Lab, that the consequences of a dominated Federal Reserve could be significantly detrimental to the economy.
While Trump is not directly referenced in the FT article, his involvement clearly lurks throughout. Trump nominated Jerome Powell as head of the Federal Reserve in 2018, yet was soon riled by Powell’s decision to increase rates, even threatening dismissal.
Although he’s expected to reduce rates in September, Trump has cautioned Powell not to do so pre-election, claiming it would be a clear overstep. Powell’s role as head of the Federal Reserve is secure till 2026, but Trump has hinted at the possibility of early dismissal – a move that would likely prompt legal disputes and market instability.
Even though markets responded positively to Trump’s reassurances to Bloomberg that he would allow Powell to complete his term, little notice was given to the caveat: “especially if I thought he was doing the right thing”.
This can be construed as an unspoken intimidation: abide by my directives once I retain presidency, and avoid rate reduction in September. It is likely Powell will resist Trump’s influence as he has done in the past, however, it is plausible Trump could nominate a more pliant replacement post 2026. If the independence of the Fed is compromised, it could be a major disturbance, and Tedeschi is accurate to highlight this emergent political threat.
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