Scapegoating the Federal Reserve

Daily update

US President Trump issued a letter purporting to fire Federal Reserve Governor Cook—an unprecedented action. After recent comments, investors will inevitably view this as an assault on Fed independence. There are obstacles—Trump already appointed a majority of Fed governors, without changing policy independence. If the dismissal survives the courts, the Senate must confirm any successor. Fed presidents still have policy votes. Faith in these checks may limit the negative market reaction.
The Fed may be the next economic “scapegoat”. Scapegoat economics blames a single group for economic insecurity. Earlier this year, US politics focused on “it’s all the fault of foreigners”. That became harder to argue post-trade taxes (it would be an admission that trade taxes are not helping). While most US voters have only a hazy understanding of what the Fed is, it is a convenient scapegoat for economic weakness. Challenging Fed independence will have negative economic consequences.
France’s Prime Minister Bayrou called a vote of confidence on 8 September. Concerns over the impact of political instability on fiscal policy have pushed up French bond yields.
US July durable goods and capital goods orders data are due. The UK British Retail Consortium shop price index was a little lower than expected, with deflation in non-food items.