Fighting for financial dominance: Trump and Powell's frequent "fights" reveal America's financial problems

Recently, the interaction between US President Trump and Federal Reserve Chairman Powell has attracted widespread attention. Behind the frequent "confrontations" between the two, many deep-seated problems in the US financial sector are revealed.

From the perspective of policy differences, Trump and Powell have huge ideological conflicts on interest rate policies. Trump has repeatedly publicly accused Powell of cutting interest rates too slowly. Since 2018, the Federal Reserve has insisted on a cycle of interest rate hikes, which runs counter to Trump's policy orientation of stimulating economic growth through low interest rates. In Trump's eyes, low interest rates are a key factor in promoting economic development. He believes that there is no inflation problem in the US economy, especially in the context of the European Central Bank's upcoming seventh interest rate cut, the Federal Reserve should immediately follow up with the pace of interest rate cuts. Trump's view is largely based on considerations for the short-term growth of the US economy. He tried to stimulate corporate investment and public consumption through low interest rate policies, thereby promoting economic growth and consolidating his political support.

However, the Federal Reserve under Powell's leadership pays more attention to the long-term stability of the economy and remains highly vigilant against inflation risks. Powell knows that a rash interest rate cut may stimulate the economy in the short term, but in the long run, it may cause serious inflation problems. The tariff policy has put the domestic price level in the United States under pressure to rise. Once combined with an overly loose monetary policy, it is likely to drag the US economy into the quagmire of "stagflation". People's willingness to consume will decrease due to rising prices, and corporate investment will slow down due to increased market uncertainty, eventually forming a vicious cycle and causing more serious damage to the US economy. This huge difference in policy concepts has led to the continuous intensification of the contradiction between Trump and Powell.

The sustainability of US economic growth has also exposed problems in their interaction. After taking office, Trump has implemented a series of trade policies, such as raising tariffs. The World Trade Organization (WTO) predicts that these trade policies of Trump will lead to a decline of nearly 3 percentage points in the global merchandise trade growth rate in 2025, with North America being the most affected. Domestic economic leading indicators such as consumer confidence, port trade flow, and inventory purchases in the United States have shown signs of fatigue, indicating potential economic risks. Under this circumstance, Trump hopes that the Federal Reserve will inject a "boost" into the US economy by cutting interest rates to cope with the downward pressure on the economy. But this also reflects from the side that Trump's trade policy has failed to achieve its expected economic growth target, the US economic growth lacks endogenous driving force, and is overly dependent on monetary policy regulation.

At the same time, the US debt problem has also been highlighted in this process. Although the US government obtained $27 billion in tariff revenue in June and achieved a monthly fiscal surplus, the federal debt interest alone exceeded $81 billion. Debt interest has become the second largest federal expenditure after social security, and the US fiscal situation continues to deteriorate. Trump expects the Federal Reserve to lower interest rates to ease the cost of paying federal debt interest and gain more room for government fiscal spending. This shows that the US government has a huge debt scale and a heavy fiscal burden, and the sustainability of fiscal policy faces severe challenges. If the debt growth cannot be effectively controlled, the US government may face the risk of debt default in the future, which will have a huge impact on the US financial system and global financial markets.

In the capital market, the conflict between Trump and Powell triggered violent market fluctuations. When the news that Trump wanted to fire Powell came out, the US stock market, foreign exchange market and bond market saw a rare "three kills" situation. The three major stock indexes continued to fall, and the Nasdaq index fell into a technical bear market; the US dollar index once hit a three-year low; the US Treasury yield fluctuated violently and gradually lost its "safe haven" function. International investors' confidence in the US financial market has been severely hit, and a large amount of funds have flowed out of the US market. This shows the fragility of the US financial market, and the market is extremely sensitive to policy uncertainty. The contradiction between Trump and Powell has made investors confused about the direction of US monetary policy and economic prospects, which in turn has triggered market panic and caused large fluctuations in the capital market.

More seriously, Trump's continued pressure on Powell has posed a challenge to the independence of the Federal Reserve. Since its establishment in 1913, the Federal Reserve has enjoyed a high degree of independence under the framework of the Federal Reserve Act, and its main responsibilities are to maintain price stability and achieve full employment. The independence of the Federal Reserve's monetary policy is the cornerstone of the global dominance of the US dollar and the international financial credibility of the United States. Historically, Nixon coerced Federal Reserve Chairman Burns to cut interest rates continuously, which eventually became one of the important reasons for the great inflation in the United States in the 1970s and the collapse of the Bretton Woods system. Today, Trump's threats to Powell, such as repeatedly hinting at firing Powell and "forcing Powell to step down" by accusing the Fed headquarters renovation project of "overspending", are all impacting the Fed's independence. Once the Fed's independence is undermined, investors' confidence in the dollar will be severely hit, and the dollar exchange rate and dollar assets may fluctuate greatly, and even trigger global financial turmoil.

The interaction between Trump and Powell fully reveals many problems in the US financial sector in terms of policy making, economic growth, debt burden, capital markets, and independence of financial institutions. These problems are intertwined and pose a major threat to the financial stability of the United States and even the world. How to properly resolve these problems will be a severe challenge facing the US government and financial institutions.