The Federal Reserve building in Washington, DC.
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As the U.S. election tightens, Asian policymakers are paying increasing attention to what a Donald Trump 2.0 presidency might mean for the region’s economies.
Though Trump’s China tariffs are a big concern, Asia is equally focused on what a second Trump presidency might mean for the Federal Reserve, the protector of the reserve currency.
Trump’s contempt for the globe’s most powerful monetary authority is well known. During his 2017-2021 stint in the White House, Trump went after his hand-picked Fed chairman early and often. Jerome Powell buckled.
In 2019, Chairman Powell bowed to Trump’s demands to lower rates. Trump attacked the Powell Fed in speeches, press conferences and on social media. Trump even mulled firing Powell. That year, the Fed began adding liquidity to an economy that didn’t need extra help.
While the Trump gang blamed President Joe Biden for surging inflation, Trump’s Fed meddling set the stage for the price surge to come. It also tarnished the Fed’s credibility in global markets.
And for Asian leaders, it’s a uniquely personal assault on the Fed’s standing. Asian central banks are sitting on the biggest stockpiles of U.S. Treasury securities. Japan alone holds $1.1 trillion of U.S. debt; China $770 billion.
More broadly, Asia’s largest holders of dollars are sitting on about $3 trillion worth. It means that a Trump 2.0 presidency would put at risk vast amounts of Asian state wealth.
In a recent interview with Bloomberg, Trump readily mocked Powell’s policymaking team. “I think it’s the greatest job in government,” Trump said. “You show up to the office once a month and you say, ‘let’s say flip a coin’ and everybody talks about you like you’re a god.”
But Trump also defends the right of the president to cajole the Fed into lowering rates.
In August, Trump said “the Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot.” He went on to say that “I feel the president should have at least say in there, yeah. I feel that strongly. I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.”
This, frankly, is People’s Bank of China stuff. Granted, the idea of central bank independence has gotten rather muddied. Look no further than the Bank of Japan, which has held interest rates at or near zero for 25 years. No truly autonomous central bank would do that.
The Fed is different, though. The dollar is the linchpin of global finance. Anything that dents trust in the dollar and U.S. Treasuries make the entire system shakier. Hence Asia’s concerns about the damage Trump could do.
The backdrop matters. The U.S. national debt is cascading toward the $36 trillion mark. At the same time, even if Trump loses to Kamala Harris, it’s not like he will go away quietly.
But Trump 2.0 would give Asia myriad other reasons to worry. A big one is his supersized tariffs on China and Asia more broadly. They’re sure to send U.S. inflation skyrocketing.
Another: Trump’s dangerous flirtation with default. In 2016, for example, Trump told CNBC that “I would borrow, knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good. So therefore, you can’t lose.”
In 2020, the Washington Post reported that the Trump White House mulled cancelling debt held by Beijing amid trade tensions. With the U.S. national debt twice the size of Chinese GDP, it’s not hard to understand how much of a financial earthquake that would be.
All this plays into China’s hands, in certain ways. Sure, Chinese leader Xi Jinping worries about policies that damage the dollar. But Trump’s exploits also help make Beijing’s case for an alternative to the dollar.
A key Xi initiative has been to internationalize the yuan. The effort has indeed made inroads. But Trump’s assault on the dollar’s global standing may accelerate the changing of the guard in currency circles.
Amid extreme uncertainty, at least one is clear: Trump putting his name on the Fed’s role in the economy won’t redound to Asia’s benefit.