US stocks and the dollar fell sharply as US President Donald Trump’s attack on the US Central Bank chief shakes investors’ confidence in the world’s top economy.
The Benchmark S&P 500 fell 2.36% on Monday, one of the sharpest daily declines of the year.
The high-tech Nasdaq Composite fell 2.55%, cutting the index by nearly 18% from its position earlier this year.
The dollar hit its lowest level in three years, at one point weakening to 97.923 against a basket of major currencies.
Also, US government bonds fell as investors sold traditional safe haven assets, with 10-year Treasury bond yields exceeding 4.4%.
Asian markets fell sharply on Tuesday, with Japan 225 in Japan, Hong Kong’s Hang Sen Index and Taiwan’s pole down around 0.8%, 0.6% and 0.5% at 02:00 GMT, respectively.
The sudden loss came when Trump renewed his attack on US Federal Reserve Chairman Jerome Powell and branded “Major Loser” and “Mr. Too Late” on social media to not move fast to cut interest rates to central bank bosses.
Last week, Trump repeatedly threatened Powell’s replacement, saying that his firing “can’t come quickly enough.”
On Friday, Trump’s top economic adviser Kevin Hassett said he was studying the possibility that the administration would eliminate Powell, who will remain in office until May next year.
Since announcing its recent cuts in benchmark rates in December, the Federal Reserve Policy Commission has expressed even more caution about further lowering rates in the near future amid concerns that Trump’s swept tariffs will blow out inflation.
In a speech last week, Powell warned that tariffs could help the US economy tackle weaker growth, higher unemployment and higher inflation, putting the double target of central banks’ maximum employment and stable prices in “tension.”
“We know from experience in the US and many other countries that politicians are tempted to ease monetary policy while in office, because the initial impact is to increase growth and employment. Perhaps when higher inflation emerges when they take office, said Joseph E. Gagnon, senior fellow at the Peterson Institute of International Economics.
“The market understands this and is worried that President Trump will try to revoke years of protections against the Fed’s political interference.”
Powell, who was appointed by Trump in 2017 and tapped for former US President Joe Biden to serve another four-year term, said he would not resign if asked, claiming that he could only be ruled out for fraud.
Under a US Supreme Court ruling filed in 1935, the administrative department is prohibited from dismissing heads of independent federal agencies, such as the Federal Reserve, except for the “cause.”
The Trump administration, which seeks to gain many established norms, is trying to overturn the 90-year-old precedent in a Supreme Court case related to the dismissal of the head of the Merit System Protection Commission and the rejection of the National Labor Relations Commission.
The move to dismiss Powell will almost certainly send a shockwave through financial markets, given the over century of principle that the Federal Reserve should free interest rates from political considerations.
On Monday, Austan Ghoolsby, president and chief executive of the Federal Reserve Bank of Chicago, warned that efforts to undermine central bank independence would have a negative impact on the economy.
“If there is interference in the long term, it would mean higher inflation,” Ghoolsby said in an interview with CNBC without directly commenting on Trump’s attack on Powell.
“That would mean worsening growth and increased unemployment.”
Gagnon said the financial markets are responding to “highly likely presidential interference” with the Federal Reserve.
“More generally, investors are less interested in holding investments in the US if they believe the Fed will not be independent in the future, because it means that the US economy will not perform in the future, just like it did in the past,” he said.
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