Why political pressure on the Fed and other central banks is so toxic for investors

Investors sent a warning Wednesday that central-bank independence matters to Wall Street.

- Jack Pitcher & Matt Wirz

Reports that President Trump was again pondering firing Federal Reserve Chairman Jerome Powell drove longer-term Treasury yields higher and the dollar lower. The markets see the prospect of higher inflation if a new Fed regime were to cut rates in line with Trump's wishes. Some analysts say there would be global consequences, because Treasurys and the dollar underpin financial markets worldwide.

Trump told reporters Wednesday at the White House that it was "highly unlikely" he would fire Powell, adding later, "Unless he has to leave for fraud." Trump alluded to an effort by White House advisers to target renovations at Fed properties that have cost more than planned.

The market's moves faded as the day went on, but the message was clear: Don't mess with the Fed.

Past examples of tension between heads of government and their central bankers offer clues about how the Trump-Powell showdown could play out. Politicians usually want lower rates, mindful of consumer and business borrowing costs. Central bankers need to promote stable prices.

"Political pressure and, in this case, presidential pressure increases the risk that there will be a pedal-to-the-metal inflationary episode," said Mark Spindel, an investment manager who co-wrote a history of Fed independence.

Squeezing blood

The modern concept of Fed independence can be traced to the 1951 Treasury-Fed accord, which gave the central bank a freer hand to set interest rates as it saw fit.