The Central Banker and the Judge

President Trump backtracking on earlier comments on “terminating” J. Powell at the Fed has brought some measure of calm to the market, but we do not think the issue is settled. Before its summer recess the Supreme Court may release its decision on the termination of officials in other independent federal agencies with potentially crucial ramifications for the Fed. Should the Court open the door to terminations over policy disagreements – something which since 1935 has not been possible – then the mere risk that policy conflicts could lead to dismissal would dent the central bank’s independence, even if the President does not effectively act on it. However, if the Court confirms the high level of protection Fed leaders enjoy, then influence via nominations should have fewer radical implications: on top of J. Powell, only one other member of the board is due to be replaced by the end of 2028. The committee would still be dominated by “old” Governors and the Presidents of the regional Feds – who are not appointed by the President. Still, irrespective of the Court’s decision, there is a shift in the US in the conception of government. The debate between “big” and “small” government” is leaving way to “free” versus “restrained” government, with consequences for policy predictability in the US and its status as the world’s dominant issuer of risk-free assets.

Reading the US economy is going to be particularly difficult in the months ahead, with tactical behaviour on the timing of imports, management of inventories and margins blurring the picture. This week’s release of Q1 GDP will set the scene however – we expect a positive, but soft figure (+0.5% annualised). Still, what is key for the Fed in the short run is the labour market. It seems that the impact of the immigration crackdown is already meaningfully affecting hiring difficulties: lower job creation may not ease wage pressure quickly. The Employment Report for April, out this Friday, may help to shed more light. Meanwhile, in Europe, the latest business confidence surveys suggest some resilience, especially in France, but from such a mediocre starting level that we do not think their message is that comforting.