LIVE MARKETS-Trump, Powell spat raises fears for renewed inflation

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TRUMP, POWELL SPAT RAISES FEARS FOR RENEWED INFLATION

Longer-dated Treasury yields rose and the U.S. dollar renewed its slide on Monday after White House economic adviser Kevin Hassett on Friday said U.S. President Donald Trump and his team were continuing to study if they could fire Federal Reserve Chair Jerome Powell.

The comments put focus on whether the U.S. President has the power to remove the Fed Chair and raised concerns over the independence of the U.S. central bank.

The markets also see the issue as one that risks higher inflation. Powell is seen, for now, as prioritizing price stability over growth, especially on concerns about tariffs leading to a renewed uptick in price pressures.

Trump, meanwhile, says that rate cuts are needed in order to head off an economic slowdown. He posted on social media on Monday that prices have fallen and also implied again that Powell is politically motivated to not cut rates.

Analysts say that the risks of tariffs both increasing inflation and slowing growth have complicated the picture for central bankers.

“The dueling monetary policy consequences of Trump's tariff regime have put monetary policymakers in a bind as tariffs are expected to shift the trajectory of the economy in a way that moves the Fed away from both of its longer-run goals,” BMO Capital Markets interest rate strategists Ian Lyngen and Vail Hartman said in a report.

“There's a sense that the inflation side of the Fed's dual mandate has once again become a clearer priority. Not only did Powell go out of his way to emphasize that price stability is a prerequisite for maximum employment, but the Chair continues to use relatively more emphatic language around the price stability objective than maximum employment,” they said.

Powell said on Wednesday the Fed would wait for more data on the economy's direction before changing interest rates.

Meanwhile, Will Compernolle, a macro strategist at FHN Financial, warns that Treasury yields could shoot sharply higher were Trump to replace Powell.

“It’s difficult to overstate the importance of central bank independence in anchoring markets’ long-term inflation expectations,” he said. “The topic drives investment away from US assets on the margins, but long-term yields will soar if the market perceives a real risk to the Fed’s credibility, not rise a few basis points.”

(Karen Brettell)

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