TOKYO — Investors betting against a MAGA-fied Federal Reserve are rapidly getting used to disappointment.
On Friday (January 9), as Fed Chair Jerome Powell has since detailed in a video message, US President Donald Trump’s administration threatened a criminal indictment via grand jury subpoenas.
The dramatic escalation in Trump’s attacks on America’s most globally respected institution is the last thing Asian markets need.
Powell was quick to push back, warning the world not to accept Trump World’s pretext that the legal action concerns an ongoing renovation of the Fed’s headquarters.
“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,” Powell deadpanned for the camera.
Trump’s latest salvo at the Fed is sure to unnerve global markets already questioning the dollar’s status as the reserve currency. And the sanctity of US Treasury securities, which play a linchpin role in the global financial system.
“We expect the dollar, bonds and stocks to all fall in Monday trading in a sell-America trade similar to that in April last year at the peak of the tariff shock and earlier threat to Powell’s position as Fed chair,” says Krishna Guha, an analyst at Evercore ISI.
“We are stunned by this deeply disturbing development, which came out of the blue after a period in which tensions between Trump and the Fed seemed to be contained.”
Yet Trump’s gambit is a gift to China, which is watching the US fire financial bullets into the economy’s feet in real time. The pushback from Powell reflects his desire to be remembered more as a Paul Volcker than an Arthur Burns.
The former Fed chair arrived in the job in 1979 to wage a literal eight-year war against inflation — and he won. It took 20% interest rates and Volcker getting inundated with death threats, but it set the stage for the economy to thrive.
The Burns legacy is distinctly different. Powell is wise to avoid assuming the position of 1970-1978 Fed leader whose lackadaisical stance toward inflation — which many believe was out of fear of Richard Nixon’s White House — helped create the crisis Volcker was hired to end.
For Asia, Trump’s working to strip the Fed of its independence is personal. Japan and China are by far the largest holders of US government debt. Both governments are stuck with nearly US$2 billion in combined dollar stockpiles.
The tariffs and Trump’s Venezuela adventure are already angering the globe. So is a US national debt zooming toward $39 trillion and an inflation rate that’s too close to 3% for comfort. And now Trump is tightening the screws on the Fed in unprecedented ways.
Suddenly, Trump’s comments last week read more sinister than they did at the time. Trump’s proposal was that government-sponsored enterprises Fannie Mae and Freddie Mac purchase $200 billion in mortgage-backed securities.
It’s the sort of financing role the Fed would perform in times of credit market distress. Trump, appearing to try an end-run around the Fed, struck many as a way to revive quantitative easing. Economist Mohamed El-Erian at Allianz calls it the “people’s QE.”
The plot thickens when one considers the Bloomberg interview Fed Governor Stephen Miran did last week. Trump’s most recent addition to the Fed board said he’s looking for 150 basis points of cuts this year to boost the labor and housing markets.
It’s hard to argue the US economy needs more stimulus at a moment when inflation is well above the Fed’s 2% preference, Wall Street stocks are soaring to all-time highs and US unemployment is just 4.4%.
The backdrop here isn’t comforting. In April 2024, on the campaign trail, Trump surrogates, including Robert Lighthizer, a former US trade representative, floated the idea of devaluing the dollar.
As Trump goes after the Fed anew, the sense of dread is rising in Asian capitals. Powell’s term, after all, ends in May. Many traders believe that, in addition to hoping Powell will resign early, Trump is warning other Fed officials to do as he commands.
Prosecutors in the Trump administration are also targeting Fed Governor Lisa Cook for alleged mortgage fraud. The entire effort is more the stuff of Argentina, India and Turkey than a nation that prints the global reserve currency and issues the top debt instrument.
Trump’s campaign for a weaker dollar also suggests he knows little about how Japan’s now-decades-long undervalued yen policy is backfiring on Asia’s No 2 economy.
Part of the problem is Trump’s 1985 mindset. Back then, the top industrialized nations could agree in a New York Plaza Hotel ballroom to weaken the dollar.
Forty years later, his desire for a “Mar-a-Lago Accord” seeks to recreate a global trade dynamic that no longer exists. Not when so much of the global wealth needed to command markets is in the broader BRICS (Brazil, Russia, India, China, South Africa) universe, including oil-rich states such as Saudi Arabia and the United Arab Emirates.
Even so, Trump’s top economic officials, including Treasury Secretary Scott Bessent, clearly haven’t schooled him on why the “exorbitant privilege” that Washington enjoys, including the ability to issue debt at markedly low yields, is a plus for America.
Might all this come to a head in 2026? Even the May decision by Moody’s Investors Service to revoke Washington’s last AAA rating caused little more than a ripple in debt markets. The reaction was that the dollar, for better or worse, remains the global system’s primary currency, despite intensifying efforts to find alternatives. For now, at least.
Trump’s effort to Chinafy the Fed sure won’t help. One of the biggest demerits against the yuan becoming the reserve currency is the lack of independence of the People’s Bank of China.
As US Senator Thom Tillis, a North Carolina Republican, put it: “If there were any remaining doubt whether advisers within the Trump administration are actively pushing to end the independence of the Federal Reserve, there should now be none.”
Putting the Fed under executive branch control would be an own-goal that makes Chinese leader Xi Jinping’s year. Sure, it might be disastrous for China’s $689 billion of US Treasuries. But it would do more to increase China’s appeal as an investment destination.
Only time will tell whether Trump tries to ratchet up the pressure further. Brian Jacobsen, an economist at Annex Wealth Management, notes that “Powell may protest by staging a sit-in.
His term as Chair is up in May, but his term as a governor isn’t up until January 2028. With the political pressure on the Fed, he may choose to stay on as a governor out of spite. It would deprive President Trump of the ability to stack the board with another appointee.”
Terry Haines, founder of Pangaea Policy, called Powell’s response “an unprecedented public middle finger to Trump” and said that no matter where this story goes, the spectacle “damages markets’ confidence in Trump.”
He added: “It will provoke a new round of market jitters.”
Follow William Pesek on X at @WilliamPesek