Federal Criticisms by Trump Fuel Strength in USD, Reaching Three-Year Peak

Federal Criticisms by Trump Fuel Strength in USD, Reaching Three-Year Peak

TrumpRebukesFedChief Again, PoundSoars

The British pound has rocketed to its highest point against the US dollar in nearly four years, following President Donald Trump's latest barrage against the Federal Reserve.

The surge saw the pound reach close to $1.3725, with Sterling climbing over 0.6%. The DXY index, a measure of the dollar against a basket of currencies, dropped 0.56% to around 97.13.

President Trump's verbal assault was triggered during his visit to Europe for the NATO summit. In response to questions about the Fed's Chair, Jerome Powell, Trump stated he had "three or four people" in mind as potential replacements, despite Powell's term not ending until 2026.

Trump has been vocal in his criticism of Powell, tagging the Fed chair as "terrible" and "stupid." His continued pressure on the Fed to lower interest rates is aimed at driving economic growth. However, Powell has maintained a cautious stance, reaffirming his "wait-and-see" approach during a recent congressional hearing.

If Trump succeeds in removing Powell, Kathleen Brooks, research director at XTB, predicts that a more dovish chair could be appointed, who would likely lower interest rates. This could result in a decline in US bond yields, thereby impacting the dollar.

Trade barbs as Trump's frustration grows

Trump has repeatedly criticized Powell, particularly during disappointing economic data releases. After unemployment figures in June showed only 37,000 jobs were added - the smallest gain since March 2023 and significantly below forecasts of 110,000 - Trump lashed out at Powell, calling him "unbelievable."

Trump's displeasure stemmed from Powell's focus on maintaining the Fed's independence from political influence and preserving its credibility. In his efforts to combat inflation caused by the White House's tariffs, Powell has advocated a hawkish stance.

Powell stated during a congressional hearing this week that he expected tariff inflation to manifest more profoundly and that the Fed was uncertain how much of it would be passed onto consumers.

Regarding Powell's tenure, his term as chair of the Fed will expire in May next year, although he will remain on the board of governors for another two years.

Implications of Trump's Interference

President Trump's repeated demands for the Fed to lower interest rates and his potential replacement of Jerome Powell could have several potential ramifications:

1. Monetary Policy and Inflation Risks
   The Federal Reserve's internal division centers on the timing of rate cuts. Some members support a swift reduction to stimulate borrowing and spending, while others, such as Powell, advocate holding rates steady to tackle inflationary pressures, particularly concerns about tariffs pushing inflation higher[1][2]. Lowering rates too soon could compromise the Fed's ongoing efforts to bring inflation back down to its 2% target, potentially leading to higher inflation in the medium to long term.
2. Fed Independence and Credibility
   Jerome Powell and many economists underline the importance of the Fed's independence from political influence. Replacing Powell with a more dovish chair willing to cut rates at Trump's request could politicize the Fed, damaging the institution's credibility and potentially reducing its ability to manage inflation effectively, leading to higher inflation expectations and economic instability[2].
3. Political and Economic Uncertainty
   Even if Trump appoints a new Fed chair more aligned with his preferences, promoting steep rate cuts could be challenging. Market experts have expressed skepticism, and economic forecasters doubt that interest rates will decline dramatically anytime soon, regardless of Trump's preferences[2].
4. Short-Term vs Long-Term Impact
   While lower rates might offer a temporary economic boost and alleviate political pressure on the administration, the long-term consequences of undermining the Fed's independence and prematurely easing monetary policy could include elevated inflation, reduced market confidence, and a loss of central bank credibility[1][2].
5. In the realm of finance and general-news, Trump's persistent criticism of Fed Chair Jerome Powell and his potential replacement has stirred debates about the future of monetary policy and inflation risks.
6. The business world is closely watching the political environment, as Trump's push for a more dovish Fed chair could threaten the Fed's independence, damage its credibility, and lead to higher inflation expectations, consequently causing economic instability.
7. As Trump continues to pressure the Fed to lower interest rates, investors are wary of the short-term gains, understanding that the long-term consequences could include elevated inflation, reduced market confidence, and a loss of central bank credibility.

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