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Trump’s Criticism of Federal Reserve Chair Sparks Market Turbulence

On Monday, President Donald Trump intensified his criticisms of Jerome Powell, the Chair of the Federal Reserve, urging the central bank to lower interest rates to stimulate the economy. His comments contributed to a decline in stock markets across both the U.S. and Canada.

In a pointed remark, Trump referred to Powell as “a major loser” and claimed that prices for energy and groceries were “substantially lower,” suggesting that there was “virtually No Inflation.” However, he warned that without rate cuts, the economy could face a slowdown.

Gas prices have indeed dropped over the past two months, partly due to decreasing oil prices driven by concerns over diminished economic growth. In contrast, food inflation surged in both January and March, and overall inflation remains above the Federal Reserve’s target of 2%.

Trump’s critical comments led to a decline in the stock market and the value of the U.S. dollar, as investors both domestically and internationally express increasing uncertainty about the U.S. economic outlook.

Adding to the instability, a senior White House advisor mentioned on Friday that the administration is contemplating whether to remove Powell from his position. Such a move would likely undermine the independence of the Federal Reserve and could send shockwaves through global financial markets.

Following Trump’s remarks, the stock market reacted sharply. The Dow Jones Industrial Average fell by more than 1,000 points at the start of trading, while the S&P 500 index plummeted nearly 3% during midday sessions. Concurrently, the U.S. dollar sank to its lowest level in three years.

In Canada, the S&P/TSX composite index fell over 220 points during the same trading period.

Tech Giants Hit Hard as Market Plummets

On Wall Street, several major technology stocks played a significant role in driving indexes down, particularly as their earnings reports are anticipated later this week. Tesla, for example, saw its stock drop by 7%, falling nearly 50% from its peak in December, amid criticism that its stock valuation was overly inflated and that its brand had become too intertwined with CEO Elon Musk.

Nvidia’s stock also declined by 5.6%, marking a third consecutive decrease, following the announcement of new U.S. export restrictions on chips to China that could affect its revenue by $5.5 billion in the first quarter. Big tech companies like Apple, Microsoft, and Amazon also faced declines of 3.5%, 2.5%, and 3.6%, respectively.

Overall, the market environment on Wall Street was dire, with an estimated 97% of S&P 500 stocks experiencing a drop.

The Threat to Federal Reserve Independence

The Federal Reserve, designed as an independent agency, typically performs better under circumstances free from political influence, as evidenced by historical economic outcomes. Central banks often need the autonomy to make unpopular decisions, such as raising interest rates, to manage inflation effectively.

The yield on 10-year Treasury bonds has been increasing, influenced by Trump’s more aggressive trade policies and his continued criticism of Powell and the Fed. As of Monday, this interest rate reached 4.37%.

It is unusual for the dollar to depreciate when stocks are declining and Treasury yields are rising, as typically investors flock to U.S. government bonds during times of economic instability, thereby lowering yields. Current market reactions, however, suggest that investors are growing wary of U.S. market volatility.

Trump also criticized Powell for what he perceives as a delay in adjusting interest rates, citing a consensus among Fed officials that they acted too late in 2021 when inflation first began its upward trajectory.

Powell has emphasized that the Federal Reserve is navigating a “challenging scenario.” The interplay between Trump’s tariffs and inflation presents the Fed with the dilemma of possibly raising rates to combat inflation while managing potential economic slowdowns resulting from the tariffs.

“Our tool only does one of those two things at the same time,” Powell stated last week, ultimately indicating that the Fed would remain cautious as it assesses the impact of ongoing trade policies.

In an apparent fit of frustration, Trump asserted his authority to dismiss Powell, hinting at a potential major legal battle that could escalate to the Supreme Court, although Powell has asserted that the president lacks this authority and intends to fulfill his term until May 2026.

Kevin Hassett, directing the National Economic Council, noted that the administration is still evaluating the situation regarding Powell’s future. He expressed that Trump’s team will continue to analyze their options, while simultaneously accusing Powell of politicizing his role.

In a different stance, Republican Senator John Kennedy defended Powell, emphasizing the importance of preserving the Federal Reserve’s independence. “I don’t think the president, any president, has the right to remove the Federal Reserve chairman,” he stated during an interview.

Additionally, Austan Goolsbee from the Chicago branch of the Federal Reserve underscored that undermining the independence of the Fed could lead to adverse economic conditions, including higher inflation and reduced economic growth. Economist William English from Yale echoed these sentiments, suggesting that ongoing attacks on the Fed could ultimately harm the American public.

Source
globalnews.ca