The Federal Reserve. The Central Bank of the world, and the most important non-governmental institution in the United States. It has guided America through the Gold Standard, Bretton Woods and the wreckage of the 2008 Financial Crisis, with its impact reverberating across the global economy. Shielded from the tentacles of the White House, politics is barred from permeating the hard economic data that the Fed uses to ensure strength and stability in the US economy. But it is under attack. President Trump has quarrelled with just about every institutional opponent he can think of, but this one is unique.
“My biggest threat”, this is how President Trump declared that sees Fed.
The size, the scope, the power of the Federal Reserve make it a formidable opposition; one for which Trump must tread carefully, or risk ravaging the economic miracle that he believes he created.
As millions of loans were called in, the immovable banking behemoths began to crumble and dark clouds rose above the US economy in October 2008, the Federal Reserve was there to save it. Dark memories of the 1930s lingered in the fears of Fed Chairman Ben Bernanke. Yet by orchestrating the $700bn Troubled Asset Relief Programme to save the banks, slashing interest rates from 4.5% to 0 and implementing emergency credit programmes to calm the turbulent credit markets, the Fed prevented total financial destruction. Recession did not become Depression.
As the Presidential race heated up, Trump turned his fire towards the ultra-low monetary policy of the Fed; a decade on from the crisis, Chairman Janet L. Yellen was attacked for supporting Obama through her obstinacy towards interest rate hikes. The economy was booming, 15 million jobs had been created and out of the wreckage, America’s financial system had grown stronger. Yellen should be “ashamed”, Trump scolded, for keeping stock markets buoyant on cheap credit to bolster Obama’s image – and so began the pressure on the Fed to raise rates.
But such an attitude has changed. The economy has continued to strengthen in the first 2 years of the Trumpian era. But all of a sudden, the President wishes Yellen had never left.
Last Thursday the Fed raised rates by a further 0.25% on their path to recovery from the unprecedented lows that history had never before seen. Setting in chain a sequence of events culminating in Mnuchin calling the 6 biggest US banks to calm their fears, stock markets collapsed. Trump hit out at the Fed as “the only problem our economy has” as stock markets tumbled towards their worst December since the depths of Depression in 1931. The S&P 500 and Dow Jones suffered their worst Christmas Eve declines in history. After previously venting of Obama’s political stranglehold on the Fed, he now wished he had such a weapon at his disposal.
Trump has attacked and scapegoated almost every potential opposition he can think of, from the Supreme Court to Wall Street to Mexico. But what makes the Federal Reserve different is its impact on The Donald’s holy grail, the one reliable source for which he could always turn when political turmoil arose, the one omnipotent force that has defined the success of the Trumpian era: the stock market.
No President has ever tied themselves closer to the markets than Trump. Having tweeted about the stock market buoyancy 63 times from his election to February 2018, the President has claimed this asset market victory for himself. Isaac Newton’s symbolic acknowledgement that his discoveries were achieved by ‘standing on the shoulders of giants’ has been all but lost in Trump’s masquerading belief in his own self-importance. He, alone, has been the divine spirit that has marched the markets to soaring heights. In fact, it was the solid economic foundation provided by Obama that provided confidence to investors to return to the stocks they frightfully abandoned during dark times a decade ago.
Trump has also lead himself down a seriously dangerous road; spreading the myth that stock markets are a perfect indicator of the US economy. They are not. Markets do reflect economic fundamentals, but they are lost in an ocean of algorithmic traders, market jitters and foreign currency movements. This supposed special relationship between the markets and the economy worked well in the early period of Trump’s reign; now it has come to haunt him. No longer are the markets only a measurement of economic success; they are now a measurement of his success.
And that is what makes the Fed an opponent like Trump has never faced before. He can attack the Clintons, the Supreme Court and Capitol Hill. But just one tweet has sparked uproar that the integrity of this historic institution, smoothing markets and the economy for the past 105 years, has been consumed in the wave of Trumpian destruction. Whilst Trump may endear to his godly stature that has created American economic success, there is only one god which market investors watch with eagle-eyes: the Federal Reserve.
Back in 2016, Trumps was symbolised by his hatred for the establishment. Troops of die-hard supporters rallied on his path to destruction to create a new world order, crushing all institutions in its wake. But the financial system will never be tamed by the President. Operating within their own separate world, a credible central bank can stabilise even the most volatile political events. Bashing the Fed will not win supporters, but only drive markets further towards their doom. Trump has always revelled in his omnipotence, transforming the world economy through his trade wars and shutting down government in response to Democrat obstinacy against funding the Mexican Wall. But now, at last, he has found an enemy that he cannot beat. Trump must tread carefully against the Federal Reserve; if not, stock markets will tumble ever further, and he will crumble with them.