Markets hate Trump’s latest attack on the Federal Reserve

In the escalating feud between Trump and Fed chair Jerome Powell, investors back Powell.

The evidence is in: If you want to lower stock values, raise interest rates, weaken the dollar and damage American prestige, a sure way to do it is to politicize the nation’s central bank.

Financial markets are loudly booing the Trump administration’s latest assault on the Federal Reserve: a criminal investigation into cost overruns at a long-running renovation project involving Fed buildings in Washington, DC. In an unprecedented video response, Powell said the cost concerns are “pretexts” and the real motivation is Trump’s disapproval of the Fed’s interest-rate policies.

American investors have never had to contemplate a central bank chief telling them he’s being prosecuted for not doing what the president wants. The news broke a stock-market rally, with investors who have been buying all year taking a breather. Long-term interest rates rose, reflecting growing fears of higher inflation. The dollar fell, which makes imported goods more expensive for Americans. Gold prices spiked, which is what usually happens when investors seek safety amid market turmoil.

“’State intervention’ ... ’attack on Fed independence’ ... ’geopolitical tumult’ ... ’sell America’ ... ’risk off’ ... These are the operative catchphrases that are weighing on investor sentiment this morning,” Patrick O’Hare of Briefing.com wrote on January 12.

Powell said the Trump Justice Dept. has issued subpoenas for material related to Congressional testimony he gave last June, when he discussed the renovation project. That means there is a federal investigation. It could lead to criminal charges, or to nothing. Powell’s term as chair expires in May, so if a legal brouhaha erupts, it would likely wind on well past his tenure.

Trump said he didn’t have anything to do with the Justice Dept. investigation, which defies belief. Trump has hammered at Powell for the entirety of his second term, threatening to fire and sue the central bank chair. The Fed has already cut short-term rates by 1.5 percentage points during the last 17 months, to levels many economists think are appropriate for an economy that’s growing solidly. But Trump wants rates to be much lower, because he thinks that would turbocharge growth. Given that Trump micromanages the whole government, it seems impossible that attorney general Pam Bondi would take a market-moving legal swipe at the Federal Reserve without Trump’s approval.

The market moves are measured, probably because investors think Trump’s latest attack on the Fed won’t work. Powell showed resolve by responding to Trump publicly and saying the pressure on the Fed won’t affect its monetary policy decisions. Investors also know a grand jury could decline to indict Powell. Or Trump could back off amid public pressure and drop the investigation. If it ever gets to court, it could end up quickly dismissed like many other Trump efforts to prosecute people on his enemies list.

Yet markets are sending Trump a clear message all the same: Manipulating the Fed for political purposes would most likely backfire. The Fed controls short-term rates, which mostly affect banks. But markets set long-term rates, including those on mortgages and most consumer and business loans. Long-term rates rise when investors expect higher inflation, which is the usual result when the Fed cuts short-term rates too much. The modest rise in rates on January 12 was exactly the opposite of what Trump wants to see.

Trump himself may not think a legal gambit will compel the Fed to change the way it sets interest rates. But he’s sending a message of his own: He will not stop trying to control the Fed. Whoever replaces Powell will be facing the same battle.