The nightmare

The Dow opened another 500 points in crimson Thursday while the price of US Treasuries dipped further into the red.

It might as well have been the blood of American investors who thought their new president would bring booming markets, lower taxes, falling inflation, rising demand and an expanding nation. Oops. Just the opposite.

And now, the ‘nightmare scenario’ just drew a little closer.

That’s the term one prominent Wall Street economist uses for the day that Donald Trump fires the head of the Federal Reserve and installs his own lackey, effectively politicizing monetary policy. It is exactly the play that Canadian Conservative leader Pierre Poilievre has advocated for the Bank of Canada.

After Fed boss Jerome Powell this week said Washington’s tariffs were larger than expected and would lead to an increase in both inflation and unemployment, plus slower GDP growth, Trump wrote this on his social media soapbox:

“The ECB [European Central Bank] is expected to cut interest rates for the 7th time, and yet, ‘Too Late’ Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!’,” Mr. Trump wrote on his Truth Social platform. “Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell’s termination cannot come fast enough!”

It was Trump, of course, who nominated Powell in his first term. Biden renominated the guy – who has won respect for his steady hand in controlling inflation and the perilous journey through the pandemic which brought it. Like our central bank boss, Tiff Macklem, Powell has ceased cutting the cost of money because of the massive uncertainty Trump’s trade war has delivered. Pausing is wise, prudent and professional. The president is none of those.

Why does this matter? After all, Trump has moved to control or influence almost every other facet of American society, while upending the economy and trying to reshape the way nations deal with each other. Why’s the Fed different?

The simplest answer is that the US dollar is the world’s reserve currency, and the Fed controls it. Not only the supply of dollars, but their value. Lately that dollar has been falling (since Trump took office) which has pushed other currencies higher (like the loonie) and threatens to make American inflation worse. If the Fed were to chop rates, as the prez urges, the dollar would tumble further. This currency manipulation would cause more trade chaos.

Moreover, the US is the world’s biggest debtor, and all that borrowing is denominated in dollars. Countries around the world hold a mess of this debt (Canada has $350 billion worth) in the form of US Treasuries. Since Trump started the trade war, the price of those bonds has dropped and the yields increased. This has put more upward pressure on interest rates in general, and pissed off the bond-holders who are looking at a capital loss. These notes have for eons been considered the most risk-free assets in the world. No more.

And the Fed, like our guys, sets interest rates. Mortgages, business loans, credit cards, car financing – the whole works. Lower rates make borrowing cheaper, heaping stimulus and liquidity into the economy. That facilitates growth, expansion, higher stock prices and more inflation. No wonder Trump wants it. This could temporarily paper over the misery of his trade policy mistakes.

But Powell says the White House will have to pry monetary policy out of his cold, dead fingers. The Fed is an indy agency. His position is protected by law. He ain’t quitting, leaving, or being dragged out.

Will that stop the president from trying?

Maybe not. After today, probably not. There will be a legal challenge, but these days Trump is ignoring the courts and ruling as an autocrat by executive order. So far he has illegally deported US residents, waged war on universities that allowed free speech and protest, attacked law firms that were hired to oppose him, approved the dismantling of the federal government, ended vaccine research along with water protection programs and life-saving foreign aid, oh yeah, mocked and trolled sovereign Canada while throwing Ukraine under the bus.

Blowing up Powell is just another day in the West Wing.

But know that if US monetary policy comes under the thumb of a political leader, especially an unprincipled grifter with failed economic fantasies, things could be forever altered.

Mr. Bond Market will be the final line of defence against men without value. Watch it.

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Source: https://www.greaterfool.ca/2025/04/17/the-nightmare/