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New York
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Federal Reserve independence is sacrosanct, the free-market wisdom goes. So why is Wall Street not freaking out about the Trump administration’s campaign to infiltrate the central bank?
The answer, in part, is that investors have made a lot of money betting on the idea that Trump will back off, reined in by some combination of the law, advisers who know better, or those mythical market “vigilantes.”
It’s a strategy that risks blowing up in their faces.
ICYMI: Stocks and bonds barely flinched Tuesday after President Donald Trump said that he had fired Lisa Cook, a top Fed official who has become the latest target of the administration’s not-exactly-subtle campaign to pressure the central bank to lower interest rates.
Cook’s attorney said she would file a lawsuit challenging her dismissal, and Cook herself has said she won’t be bullied into resigning.
If Trump’s attempt to fire her had happened in a bubble, you could maybe squint at his accusations against her — that she committed mortgage fraud — with some credulity. (Cook has not been charged with any wrongdoing.)
But what Trump is doing at the Fed has nothing to do with mortgage fraud, real or imagined.
The reality is that the president does not have the legal authority to fire Jerome Powell, the Fed chair he really wants gone. But if he can get rid of Cook, he’ll be able to nominate a fourth rate-cutting ally to fill one of the seven Fed governor seats. Now, Team Trump wouldn’t necessarily be able to hijack control of the federal funds rate right away, but it would give them sway over the central bank’s budget and the selection of 12 regional Fed presidents, who are part of the key rate-setting committee.
“We have to be honest that Lisa Cook was likely targeted…in order to remake the Fed with people who will be most inclined to cut interest rates,” Peter Boockvar, chief investment officer of One Point BFG Wealth Partners, said in a note Tuesday. “I don’t think any of us should feel good about what is going on.”
Indeed! This should be five-alarm fire for Wall Street, an institution that owes much of its success to the existence of a US monetary policy nerve center that is, by law and by tradition, insulated from the whims of any one party or politician.
Instead, the mob is beating down the Fed’s door and stocks are … fine. Equities were flat, and bond yields were up just a tad Tuesday morning, nothing to sweat over. Markets are still trading around record highs.
“I think this is a real boiling-the-frog moment,” Alex Jacquez, chief of policy and advocacy at Groundwork Collaborative, told me.“It’s hard to tell what would be the tipping point here … as long as the line is going up, everybody seems to be giving him a pass.”
To be fair, assuming Trump will chicken out has proven profitable over the past several months. Why panic when the Latest Terrible Thing never seems to happen? Plus, the US government is now taking an active role in the market — and once you start flinging around government money, “that’s a positive for the equity market,“ Daniel Alpert, managing partner of Westood Capital, told me Tuesday.
In other words, markets gonna do what markets gonna do, which is sniff out the profit opportunities wherever they may lurk.
But in doing so, investors are also signaling to Trump (and all of us!) that they’re pretty chill with whatever, so long as those interest rates come down, those corporate tax cuts get reinstated and the economic data still look solid.
“They are sweating the small stuff and missing the existential threat of US institutional destruction, or struggling to bake its long-term implications in to short-termist markets,” wrote Financial Times columnist Katie Martin earlier this month. “Hey, corporate earnings are OK and interest rates are likely to fall soon anyway, so to use a dangerous phrase, while the music is playing, we’re still dancing.”
Meanwhile, the voices of the guys who normally can’t shut up about the sanctity of free markets and limited government, have gone quiet. Corporate leaders are keeping their heads down, and the business lobbies are nowhere to be seen.
“This is a particularly unconscionable level of cowardice for the Wall Street CEOs,” Dennis Kelleher, co-founder and CEO of the nonprofit Better Markets, wrote in a memo Tuesday. “They know better than almost anyone else that the damage from this action will extend far beyond Governor Cook and the Fed.”
Kelleher added that those “so-called leaders of the financial industry” will have “no one to blame but themselves when monetary policy is thoroughly politicized, inflation rages, and financial and economic activities thrown into needless turmoil.”