Markets appear content at the thought of a second Donald Trump presidency, but are they underestimating the risks?
Yes, says Yale University’s Ernie Tedeschi, who warns in a Financial Times piece of “rising political risk” that is “likely being underpriced by markets”.
Chief economist at the White House Council of Economic Advisers until March, Tedeschi is especially concerned about the Federal Reserve losing its independence, saying testing at Yale’s Budget Lab showed a captured Fed could catalyse “profound” economic implications.
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Trump’s name doesn’t appear in the FT piece, but it doesn’t have to. Trump appointed Fed chief Jerome Powell in 2018 but soon took offence to his rate hikes, threatening to fire him on numerous occasions.
As it happens, Powell will almost certainly cut rates in September, but Trump is warning him not to do so before November’s election, saying it’s “something that they know they shouldn’t be doing”.
Powell’s term as Fed chief expires in 2026, but there had been much speculation Trump might try to fire him before then, something that would likely spark a legal challenge and market volatility.
Thus, the headlines were positive after Trump told Bloomberg he “would let him serve it out”, but less attention has been paid to the second half of the same sentence – “especially if I thought he was doing the right thing”.
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It’s not paranoia to see this as an implicit threat: don’t cut rates in September, and do what I tell you to do when I become president. Powell has resisted pressure from Trump before and can do so again, but Trump would be free to appoint someone more amenable in 2026. The Fed losing its independence would be a big deal. Tedeschi is right to draw attention to rising political risks.
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