Why fired Jerome Powell would destroy the stability of the dollar – Millennial Revolution
I think the biggest economic news that the Trump administration will see this year is the trade war, but as usual, the Trump administration continues to surprise everyone!
Over the past few days, Trump has publicly attacked Powell, calling the Fed chairman “a major loser” whose “termination cannot be seen soon.”
Trump follows Fed’s Powell again, CNN.com
“So what?” you might think. Trump is going to fire someone. Trump has been firing people! This is his business!
The Fed chair is different. These are the few times the Supreme Court has stood up against Trump, ruling that the president will not be allowed to fire the Fed’s head unless there are allegations of misconduct.
The Federal Reserve is the largest and most important central bank in the world. Founded in 1913 after a series of financial panics, the Federal Reserve is so respectful around the world that it has become a model for how a country should implement its monetary policy. One of the system’s Lynchpins is that the Federal Reserve operates independently of the government. Neither the president nor Congress can tell the Fed what to do.
If you take it away, bad things will happen.
Let’s figure out what will happen if Trump is going to deal with his own threats and firefighting Powell. Remember, Trump doesn’t want to get rid of Powell because he doesn’t like him at all. Trump said he hopes interest rates are much lower.
“You have made the United States a fortune and continue to do so,” Trump wrote in a handwritten note to Powell. “You should lower that ratio. Losing hundreds of billions of dollars.”
In the same article, Trump accused the Fed of saying, “If they do the job correctly, our country will save trillions of dollars in interest costs…we should pay 1% interest or better!”
Trump said Powell made the United States rich by not lowering interest rates. But firing the Fed chair may not solve the problem, CNN.com
He is not wrong with the cost of interest. For the first time in this fiscal year, the interest on debt will reach $ trillion. This exceeds the full budget of the U.S. government for its armed forces!
But firing Jerome Powell and appointing a Lakey that will drop interest rates, regardless of the consequences may backfire, which is why.
The return of inflation
The Fed was created by a dual mandate: control inflation and maximize employment. It does this by lowering interest rates in the recession, thereby stimulating spending. But when the economy is not in a recession, it must raise interest rates to prevent inflation from getting out of control.
We all know what happens when interest rates stay too low for too long because we all live in it. Central banks around the world have lowered interest rates to 0% during the pandemic and printed money like crazy, but they are too slow to get out of gasoline, inflation goes crazy, coming back less than 10% in 2022, and then back again.
So imagine what happens if interest rates fall like a pandemic. In addition, inflation has begun to spread due to the impact of all relevant taxes and it is possible to hit the ultra-wave of inflation pressure at one time.
We “only” 10% inflation in 2022 may end up being “a good time in the past”.
Bonds spike
Now let’s talk about bond yields.
When the Fed sets its interest rates, they will set what is called the federal funds rate. This interest rate determines the short-term interest rate you can get in money market funds and savings accounts. But the bond has multiple flavors, exceeding multiple term lengths, such as 5y, 10y and 30y. The Federal Reserve has not set these rates, nor can the federal government set them. Bond market decision.
This is the current U.S. bond yield curve.
Therefore, the data point on the left is the short-term loan interest rate, set by the central bank. These are the people Jerome Powell can control. However, the line to the right depends on how much bond traders are willing to pay for those bonds.
This is where peak inflation rates do destroy.
Let yourself wear bond traders’ shoes. If you could put your money into a savings account and earn 4%, you would buy long-term bonds, and if you pay the same interest rate, you would need to lock that money in for many years? No! You need higher yields to make up for your money.
Now, let’s add high inflation. If you know that every year, the dollar is less and less valuable because inflation is at 10%, you won’t touch U.S. bonds with a ten-foot pole unless it pays you At least Enough interest offset inflation.
This is where the danger lies in the drop in interest rates so rapidly. Although the left part of that earnings curve will drop, the right part of the line may rise so dramatically that the long-term loan ratio (used to raise funds for the government) may end up being higher than it is now.
The dollar may lose its reserve currency status
Finally, there is a giant elephant in the room and no one wants to talk about: the possibility that the dollar will lose its reserve currency status.
The whole world is not just because the United States is a superpower and does not use the US dollar as a reserve currency. China is also a superpower, but people will not hoard the RMB like holding the US dollar, because the RMB is widely regarded by the Chinese government to be vulnerable to manipulation. If their money can be belittled by Xi Jinping, no one is willing to hold a large amount of Chinese dollar.
In other words, the yuan is not considered a reserve currency because the central bank does not operate an independent agency like the Federal Reserve.
But don’t just follow my words. As for what happens when the government controls the central bank and lowers interest rates for political reasons, let’s see what’s going on in Türkiye.
Turkish President Recep Tayyip Erdoğan moved to Türkiye’s Central Bank in 2018. He has since fired five leaders of the bank (all of whom he appointed) and has usually called for keeping interest rates low…
Over the past few years, the country has seen astronomical inflation, reaching 85% in 2022. Inflation pressure has since fallen, but consumer prices in Turkey are still up about 35% from last year.
Today, the country has a benchmark short-term loan ratio of 45%.
Check out Türkiye, if you want to know why the market hates Trump’s idea of chaos with the Fed, businesssider.com
Other examples of countries trying this are Argentina and Venezuela. Soon, for the last time you thought “Man, I’m going to put my money in a safe place, so I’m going to convert it to a Venezuelan Bolivar?”
Exactly.
in conclusion
Although many actions by the Trump administration have made concerning the economy, most of them will not cause irreversible damage. If tomorrow, Trump wakes up and says, “What do you know? This trade war is a bad idea. I’ll cut tariffs to 0%,” the world economy will eventually be right.
However, wander around with the Fed and get angry in a more terrible way. If the US dollar will lose its status as the world’s reserve currency, it will not come back. The world will move to the next most stable currency, which may be the euro.
All of this is to say that politicizing the Fed would be a very bad idea and could even lead the United States to abandon its position as an economic superpower…Europe, all over the place.
What do you think will happen? Do you think Trump will eventually fire Jerome Powell? Let’s hear it in the comments below!
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