By Jamie McGeever
ORLANDO, Florida (Reuters) -TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
U.S. and world stocks posted solid gains on Monday as the dollar and bond yields fell, while encouraging corporate earnings and investor optimism that the economic damage from tariffs won’t be too severe also boosted risk appetite.
More on that below. In my column today I look at U.S. President Donald Trump’s attacks on Fed Chair Jerome Powell in the broader context of U.S. and global central bank independence.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Equity optimism hard to quell
Equity investors have the bit between their teeth. Despite huge uncertainty surrounding U.S. tariffs and trade deals, and unease about Trump’s tirades against Powell, stocks continue to march higher.
Monday’s whoosh was supported by solid U.S. corporate earnings, a weaker dollar and lower Treasury yields. Investors also continue to bet that the economic damage from tariffs will be milder than feared.
U.S. Commerce Secretary Howard Lutnick said on Sunday he was confident of securing a trade deal with the European Union, even as the EU explored possible counter-measures against the United States.
Trump has threatened 30% tariffs on imports from Mexico and the EU, and sent letters to other trading partners, including Canada, Japan and Brazil, setting tariffs ranging from 20% to 50%. This has led experts to raise their running effective aggregate U.S. tariff rate estimates to near 20%.
That would be the highest since 1933 and around eight times higher than they were at the end of last year, although sharply down from the April 2 Liberation Day extremes.
Right now, investors are shrugging this off, and one can understand why. Trump quickly climbed down after the post-Liberation Day market volatility, the August 1 deadline may be pushed back, and the final tariff rates could be different from those announced.
U.S. economic data and second-quarter earnings are generally beating forecasts too. Even if that is because consumers and businesses have, to varying degrees frontloaded purchases, sales or production ahead of the final tariffs, the incoming numbers are solid.
Citi’s U.S. economic surprises index has been rising steadily for the past month, albeit from deeply negative territory, while the equivalent European surprises index is flat-lining and China’s has been falling.
Meanwhile, Japan’s markets reopen on Tuesday after Monday’s holiday, giving stock and bond investors their first chance to react to Sunday’s upper house election which saw the ruling coalition lose its majority. Prime Minister Shigeru Ishiba has vowed to stay in situ, citing the looming August 1 tariff deadline with the United States.
Nikkei futures are currently pointing to a flat open on Tuesday.
Trump’s Fed attacks puncture veneer of central bank independence
If U.S. President Donald Trump’s public attacks on Federal Reserve Chair Jerome Powell have achieved one thing, it has been to thrust the issue of central bank independence firmly into the spotlight. But this raises the question, what does ‘independence’ really mean?
Central bank independence is widely considered a bedrock ofmodern-day financial markets. Economists, investors andpolicymakers almost universally agree that monetary policyshould be set for the long-term good and stability of theeconomy, free from short-term and capricious politicalinfluence.
But maintaining that theoretical separation betweenpolicymakers and politicians is very challenging in practice.
Ultimately, central banks are creations of – and, to varyingdegrees, extensions of – their national governments. Thelegislatures determine their statutes, parameters, goals, andkey policymaking personnel.
One need only look at the intertwined and often coordinatedresponses of countries’ central banks and governments to theglobal financial crisis and pandemic for evidence that completeindependence doesn’t actually exist.
DE FACTO OR DE JURE
‘Independence’ has two primary meanings in studies ofmonetary policy.
Academic studies often refer to ‘de jure’ independence,essentially legal or institutional independence, and ‘de facto’or operational independence. Importantly, de jure independenceis no guarantee of de facto independence or vice versa.
Perhaps surprisingly, the U.S. scores pretty low on a dejure basis, mainly because the Fed’s statutes have barelychanged since it was created over a century ago in 1913.
Davide Romelli, associate professor at Trinity CollegeDublin, has updated a central bank independence index created byAlex Cukierman, Steven Webb, and Bilin Neyapti in the 1990s. Theindex, in which 0 is no independence and 1 is totalindependence, shows the US scoring 0.61. That suggests the Fedis a less institutionally independent body than the EuropeanCentral Bank, which scored 0.90, and even the People’s Bank ofChina, which scored 0.66.
But on a de facto basis, the Fed would almost certainly rankas higher than the PBOC, given its design, transparency, andaccountability mechanisms such as the chair’s regular pressconferences and appearances before Congress.
And look at how the Fed resisted the clamor to raiseinterest rates when inflation first exploded after the pandemicas well as its patience in lowering them now given theuncertainty surrounding the U.S. trade agenda. You can argue thewisdom or folly of the Fed’s actions in either case, but bothepisodes put its operational independence on full display.
‘BANANA REPUBLIC’
When experts talk about threats to central bankindependence, they are usually referring to concerns about defacto independence.
Indeed, this is why Fed-watchers have grown increasinglytroubled by Trump’s excoriating verbal attacks on Powell overthe last six months for not cutting interest rates. If there isa line demarcating political interference, however amorphous,Trump has crossed it.
“The words that Trump uttered are the ones one expects fromthe head of a banana republic that is about to start printingmoney to fund fiscal deficits,” former Fed Chair and U.S.Treasury Secretary Janet Yellen told The New Yorker earlier thismonth.
Of course, even if Trump were to replace Powell with a moreamenable chair, this would not completely eliminate Fedindependence. The Fed chair does not single-handedly setinterest rates and represents only one of 12 votes at eachpolicy meeting.
But in many ways he or she is the first among equals, asUniversity of Maryland’s Thomas Drechsel shows in a recentworking paper.
Analyzing over 800 personal interactions between Fedofficials and each U.S. president from Franklin D. Roosevelt toBarack Obama in 2016, Drechsel found that 92% were with the Fedchair. President Richard Nixon interacted with Fed officials 160times, reflecting his infamous efforts to influence then chairArthur Burns, while only six interactions took place during BillClinton’s two terms.
To be sure, not all meetings or telephone calls involvepolitical pressure, and for purely logistical reasons, it makessense that the president would prioritize speaking with the headof the monetary policy body as opposed to all its members.
As such, appointing the governor is a key area where acentral bank’s independence can be damaged. In a 2022 academicpaper titled “(In)dependent Central Banks” revised in Februaryanalyzing 317 governor appointments in 57 countries betweenJanuary 1985 and January 2020, the authors noted that as centralbanks’ powers – and perceived independence – have expanded,political incentives to control them have intensified,”especially in an era of growing global populism.”
Thus, in many cases, the more power a central bank has toignore political pressure, the more motivated government leadersare to apply it. If that is a global trend, Trump appears to beat the vanguard.
What could move markets tomorrow?
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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