Trump’s Fed threats fail to spook markets – for now

The US Department of Justice investigation into Federal Reserve chairman Jerome Powell failed to provoke panic in markets, eliciting little more than a yawn.

US president Donald Trump denies any involvement, but it stretches credulity to think this episode is unrelated to Trump’s desire to get the Fed to do his bidding, or that the parallel campaign against Fed governor Lisa Cook is accidental.

Former Fed chairs warned this is how monetary policy works in “emerging markets with weak institutions”. It might also be described, less delicately, as gangsterish – the kind of thing “tin pot dictators” do, to quote economist Justin Wolfers.

So why the calm? Goldman Sachs notes that US monetary policy is set by committee, not by fiat. Powell, says Goldman, will continue to follow the data.

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Additionally, investors may assume the DOJ investigation will fizzle out, and that this is another Taco (“Trump always chickens out”) trade. After years of brinkmanship, investors may be inured to Trumpian drama.

Risks driven by whim rather than models are hard to price, and easier to ignore in the midst of a bull market. However, the investigation sends a dark signal. It is a warning to Powell’s successor, and to other members of the Fed board, that defying presidential wishes carries real personal risk.

Trump’s moves may have limited immediate impact, but they steadily undermine institutional confidence. The danger is slow, cumulative and perhaps only fully felt in times of crisis.