Global investors were stunned on Tuesday (August 26th) after US President Donald Trump renewed his attacks on the Federal Reserve's independence, caught between concerns over the politicization of policy and market benefits.
Trump's announcement that he was firing Fed Chair Lisa Cook caught markets by surprise, even though he had made it clear last week that Cook was a target and had been attacking Chairman Jerome Powell for months as part of his campaign to push the Fed to cut interest rates.
"This is another rift in the fabric of the United States and its investability," said Kyle Rodda, senior financial markets analyst at Capital.com in Melbourne. Rodda said he was concerned about the Trump administration's motives, suggesting the move was not about preserving the Fed's integrity, but rather about installing Trump's own people at the central bank.
"It goes back to trusting the institution," he said. While Cook's departure is not certain and she has denied Trump's authority to fire her, Trump's statement that her firing was "effective immediately" just two weeks before the Fed's policy meeting is another worrying factor for investors.
However, the market reaction was subdued. Short-term Treasury yields fell slightly, while expectations that the forced easing of monetary conditions would lead to inflation pushed the 30-year bond yield up 4.7 bps to 4.936%.
US S&P 500 stock futures fell only 0.07%, while the dollar index against a basket of currencies weakened 0.1%.
"People want to see if it will happen, but at the same time, it's very difficult to sell the US because of credibility issues," said Tohru Sasaki, Tokyo-based chief strategist at Fukuoka Financial Group. One factor investors need to consider is Trump's trade agreement, which requires countries in Europe, Japan, and South Korea to invest hundreds of billions of dollars in the United States, Sasaki said.
"If there's a lot of investment in the United States, the dollar will ultimately be supported, and so will US equities. So, you might lose money if you short the dollar or US assets." (alg)
Source: Reuters
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