The boss of JP Morgan, the largest US bank, has said Donald Trump’s attacks on the Federal Reserve chair, Jerome Powell, are putting central bank independence at risk and could backfire and ultimately push up interest rates and inflation.
Jamie Dimon told reporters on Tuesday he had “enormous respect” for the Fed chair, who on Friday became the target of a controversial criminal investigation by the US Department of Justice (DoJ) over alleged “abuse of taxpayer dollars”.
Powell has denounced the investigation, linked to a $2.5bn (£1.9bn) renovation of the Fed’s headquarters in Washington DC, claiming it is punishment for not setting interest rates in line with the US president’s wishes.
Inflation, then interest rates get pushed up. But the chances of interest rate hikes goes down considerably if the federal reserve board becomes overall dovish. Right now the board is split. Powell doesn’t make the decision on rates himself, the board votes.
The Fed has an inflation target of 2%, but that target is arbitrary. It’s not really based on anything. Some board members seem fine with a 3% inflation rate, or maybe even higher. Lower interest rates are better for people who own assets, ie wealthy people, because that can help push up asset prices. But inflation is bad for consumers.
Think of high house prices: good for house owners because that’s an asset for them and the higher the price of the asset goes, the wealthier they are. But if you’re someone who doesn’t own a house, the higher the prices go, the harder it is to acquire that asset for yourself.
The stock market is similar. Stocks are expensive right now. That’s great for people who bought those stocks at much lower prices, but not so great for people who want to start investing in stocks now.
If prices come down, deflation, that would be good for buyers, but it would be bad for people who already own. If prices go up, inflation, that’s good for people who own, but not good for buyers.