A potential US Federal Reserve stooge could trigger a significant inflationary surge in Australia, but Trump's chances of achieving this are slim. The Reserve Bank's autonomy in setting interest rates may be compromised if Donald Trump's efforts to seize control of the US central bank succeed, according to experts. This scenario is unfolding amidst a legal battle that could grant the president the authority to dismiss Lisa Cook, a member of the Fed's board of governors. The US Supreme Court is set to hear arguments on Wednesday in this pivotal case. If the court supports Trump's attempt to remove Cook, it could mark the beginning of the end for the central bank's independence. The consequences of Washington DC's potential dominance over monetary policy could be dire, potentially leading to a surge in inflation. This could trigger a crisis of confidence in the American currency and financial assets, with significant implications for other central banks. In the most severe scenario, the US dollar's depreciation could be substantial, causing the Australian dollar to skyrocket by 15%. This sudden appreciation might force the Reserve Bank of Australia (RBA) to cut interest rates, impacting the country's currency value. Despite the unprecedented attack on the Fed, investors remain unperturbed, which some economists find concerning. The Federal Open Market Committee, responsible for rate decisions, comprises 12 members, including seven Washington DC-based governors, the president of the Federal Reserve Bank of New York, and four regional reserve bank presidents. The Fed's next rate decision, scheduled for January 29, Australian time, will be made against the backdrop of a Department of Justice criminal investigation into Jerome Powell. Even if Trump fails to gain direct control over the central bank, the political pressure and threats have already eroded the institution's independence. A politically controlled Fed could maintain lower interest rates for an extended period, potentially leading to an inflationary blowout and a weakened US dollar, with negative consequences for Wall Street. This scenario could also result in lower interest rates in Australia, according to some economists. However, the likelihood of this extreme outcome is low. To reach that point, Trump would need to gain complete control over the Fed, which would weaken the institution's guardrails. Trump's push to overturn decades of political support for central bank independence could set a precedent for other populists worldwide. In Australia, the concern is that the threats to independence could extend beyond the US. The Greens' economic spokesperson, Nick McKim, has already called for legislative action to override the RBA, and populist figures on the right, like Andrew Hastie and Senator Jacinta Nampijinpa Price, may follow Trump's lead if the RBA raises interest rates this year. Despite the RBA's criticism for keeping rates too high, unions publicly support its independence. Some Australian institutional settings are already weaker than the Fed, with governors appointed by the Treasurer rather than a committee. However, Australia can still pursue an independent monetary policy, as evidenced by the divergence in monetary policy paths between the two countries. Luci Ellis, Westpac's chief economist and a former RBA official, emphasizes that Australia should not be bound by the Fed's actions. While a loss of independence at the largest and most powerful central bank could be detrimental, it would not alter the RBA's necessary behavior.
