Trump Administration Mulls Taking Stakes In Defense Firms Including Lockheed Martin

The Federal Reserve may have been late raising interest rates as inflation surged in 2021, but measures of inflation expectations throughout that period showed broad belief that prices would cool, a fact that made the battle easier and less costly to wage, with bond markets even tightening financial conditions well before the U.S. central bank hiked borrowing costs.

In a paper presented to global central bankers at a Fed conference in Wyoming on Saturday, Emi Nakamura, an economics professor at the University of California, Berkeley, said the episode showed the value of Fed credibility in action, and also the stakes on the table if that trust is eroded - a no-longer abstract risk after President Donald Trump moved on Monday to fire Fed Governor Lisa Cook in the first such move by a U.S. chief executive.

"It's easy to forget how remarkable it was that the Fed was able to look through 7% to 8% inflation while maintaining almost completely anchored long-term inflation expectations. This requires (an) extremely strong reputation," Nakamura said, something that hinges "on institutions like central bank independence and a strong track record, and those are things that take a long time to build up and perhaps not very long to destroy."

The immediate market reaction to the announced firing of Cook has been tame so far, but analysts feel the seeds of lost faith have been planted even if it remains uncertain how quickly that will matter to policy decisions or market pricing. Trump may not succeed in removing Cook, for instance, which could strengthen the Fed's standing. Reactions in the U.S. Senate, which confirms the president's appointments to the Fed and where members of both parties typically voice strong support for central bank independence, could also be important.

For now Fed policymakers are expected to begin cutting interest rates at their September 16-17 meeting, and Cook has said she intends to continue participating.

Still, "it's a huge attack on the Fed's efficacy as an independent agency, which of course is the basis for achieving its price stability mandate," said Maurice Obstfeld, a professor of economics emeritus at the University of California, Berkeley and a former chief economist at the International Monetary Fund.

"It's going to make it harder for the central bank to achieve its other prime responsibility, which is supporting employment in the economy, without possibly destabilizing expectations of inflation," he said. "The markets will understand that monetary policy decisions are likely to be more politically motivated, and the central bank will be perceived more broadly as being more focused on other goals of the administration, for example, financing our large fiscal deficit."

Trump has insisted on lower interest rates because he feels it would make it cheaper for the government to finance its large deficits, an idea that could go awry in practice if markets lose faith in inflation control and add a steeper inflation premium to bids on U.S. government debt.

'HE HAS NO AUTHORITY'

The resilience of the Fed's reputation and independence in the face of a determined chief executive has never been fully tested since the central bank was established in its current form, with a series of reforms enacted by Congress in the 1930s, in what historians say was an explicit move to distance monetary policy from White House control.

Key features of this arrangement include long 14-year terms for members of the Washington-based Board of Governors and a division of power between the board and the presidents of 12 regional Fed banks that reflects the federal structure of other parts of the U.S. government. It is rooted in the idea that elected officials are less likely to make the hard and unpopular decisions sometimes needed to control inflation than independent experts prioritizing data and analysis over election outcomes.

It is also a setup that has frustrated Trump and his administration's expansive view of executive power. After failing to pressure the Fed to lower rates since his return to the White House in January, Trump on Monday said a controversy over two residential mortgage loans taken out by Cook before she joined the central bank gave him "cause" to fire her.

Supporters of Cook, who is also the first Black woman to serve as a Fed governor, note that her term runs until 2038, far outlasting Trump's, as do the terms of two other governors appointed by former President Joe Biden. While Trump can name a new Fed chief to take over when Jerome Powell's term ends in May, as it stands the president may lack a majority of his own appointees on the board until 2028, his last full year in office, a barrier to his effort to reshape the central bank.

Even then, there's no guarantee that the central bank's governors who have passed Senate scrutiny would agree to any White House demands, with the separately hired Fed regional bank presidents also involved in policy decisions.

Cook's mortgage issue has been referred to the U.S. Justice Department, but so far no formal action has been taken. In an emailed statement on Monday night, Cook said of Trump that "no cause exists under the law, and he has no authority" to remove her from the board. Cook's lawyer, prominent Washington attorney Abbe Lowell, said "we will take whatever actions are needed to prevent his attempted illegal action."

What follows could be an important test of whether the U.S. central bank's independence over monetary policy has been more a matter of practice and protocol than actual legal protection, and in turn a test of how important that independence is to U.S. and global financial markets that have viewed the Fed as a stabilizing influence and central pillar of the world's financial architecture.

During crises, for example, the Fed has acted quickly to calm markets with programs that have crossed borders without political constraints, using "swap" lines and other tools to be sure other central banks had access to dollars they and their local companies might need.

The Federal Reserve Act does allow a governor to be removed for "cause," but does not try to define what that means. The U.S. Supreme Court, in a recent similar dispute, did seem to carve out an exemption for the Fed that would prevent removal of a governor in a dispute simply about rates.

But those were not yet full decisions, noted Kathryn Judge, a law professor at Columbia University, with much about the Fed's status still to be decided.

"The law here is under-developed because we have never had to rely on the formal law alone to protect Fed independence. Although a number of presidents have put pressure on Fed chairs, we have never faced a situation where a president has tried to fire a Fed governor," Judge said. "If the president is willing to pull out all of the stops and use an aggressive reading of his inherent authority under Article II (of the U.S. Constitution) to pressure the Fed to follow his lead on monetary policy, it is unlikely to remain independent."

Source: Reuters

Bank of England rate-setter Catherine Mann said that borrowing costs should be held for longer at their current levels to stop high UK inflation from lingering.

Mann said on Tuesday that a “more persistent hold on Bank Rate is appropriate right now” as her central case is for elevated price pressures to last for longer. She said that policy was “not tight enough” to control inflation under the market path in the BOE’s August forecast for two additional rate cuts by the second half of next year.

“A more persistent hold on Bank Rate is appropriate right now, to maintain the tight (but not tighter) monetary policy stance needed to lean against inflation persistence persisting,” she said in the text of a speech to be delivered later on Tuesday in Mexico City. “However, I stand ready for a forceful policy action, in the form of larger, more rapid Bank Rate cuts, should the downside risks to domestic demand start materializing.”

Mann is one of the most hawkish voices at the UK central bank and was one of four rate-setters to oppose the quarter-point reduction in bank rate earlier this month.

“By squeezing out inflation today, you prevent it from persisting in the future,” Mann added. “If this policy is not followed, even tighter policy would be required later to remove the resulting higher inflation and rein in the expectations drift.”

Source: Bloomberg Europe

China is sending a key trade negotiator to the US this week, the Wall Street Journal reported — indicating talks between the two sides are resuming after they agreed on a truce in their dispute.Li Chenggang will meet with US Trade Representative Jamieson Greer and Treasury Department officials, the newspaper said Tuesday, citing people familiar with the matter.

He’ll also meet US business figures, it added.

The Chinese ministries of foreign affairs and commerce, and the US Embassy in Beijing, didn’t immediately respond to requests for comment.The trade fight between the world’s two biggest economies has been in a period of calm since earlier this month when President Donald Trump extended a pause on higher tariffs on Chinese goods for another 90 days. Beijing followed the move with its own suspension.

The pause has given the countries more time to discuss other unresolved issues such as duties tied to fentanyl trafficking that Trump has levied on Beijing, US concerns about Chinese purchases of sanctioned Russian and Iranian oil and disagreements around American business operations in China.Still, the trade dispute remains one of the biggest problems in the relationship.

“Trade and tariffs — rather than tech or fentanyl — should be the focus, given Li-Greer pairing,” said Jeremy Chan, a senior analyst on the China and Northeast Asia team at Eurasia Group, who once worked as a diplomat in China and Japan.He added that China sending Li to the US is “a bullish sign for a deal that will unlock a summit” between Trump and Chinese leader Xi Jinping.Trump has said repeatedly he wants to meet Xi, adding Tuesday that “probably during this year or shortly thereafter, we’ll go to China.”Earlier this year, China named Li vice commerce minister and trade envoy. Li had been China’s ambassador to the World Trade Organization.

Source: Bloomberg Europe

France found itself mired in yet another crisis on Tuesday, after Prime Minister Francois Bayrou's gamble to win backing for his deeply unpopular debt-reduction plan backfired, plunging the country deeper into political and financial instability.

French markets tumbled after Bayrou jolted the political establishment out of its summer slumber on Monday with his unexpected move to seek a September 8 confidence vote on his debt-cutting plan. His proposal was roundly rejected by opposition parties, who said they would relish the opportunity to cut short his minority government's time in office.

In a symbolic moment that underlined his predicament, Bayrou tripped and nearly went flying as he took to the stage on Tuesday to deliver his first comments since the previous night's announcement. He said lawmakers must now choose between "chaos" and "responsibility," and urged the French to pressure their representatives to make a prudent choice ahead of September 8.

"I am not asking anyone to change his mind but one can think it over," Bayrou later told journalists.

If Bayrou falls, Macron could dissolve parliament and hold fresh legislative elections - a move he has previously rejected - or install a new government. However, neither course of action is likely to solve France's budget issues or political gridlock.

A source in a key ministry said they expected Macron to opt for a new prime minister.

"The French prime minister's decision to call an early vote of confidence is most likely to trigger his replacement with yet another prime minister or (less likely) fresh legislative elections," Capital Economics analysts wrote.

"Either way, France's budget deficit will remain well above the level needed to stabilize the debt ratio."

Interior Minister Bruno Retailleau, who leads the conservative Republicans, said it would be "irresponsible" and "against France's interests" to vote for the government to fall.

Others disagreed.

The far-right National Rally, led by Marine Le Pen, said it wants Macron to call a snap parliamentary election.

"I don't see what new prime minister wouldn't be immediately censured," a source close to Le Pen told Reuters.

The Socialists, whose vote will be crucial, also said they would vote against Bayrou.

"We need a different prime minister and, above all, a different policy," lead Socialist lawmaker Boris Vallaud wrote on X.

The confidence vote will be held two days before protests called by various groups on social media and backed by leftist parties and some unions, recalling the Yellow Vest unrest that erupted in 2018 over fuel price hikes and the cost of living.

"Unless Francois Bayrou is confirmed in office - which is a hypothesis today that appears unlikely - we will enter a new phase which will be a phase of destabilisation," said pollster Jean-Daniel Levy, predicting negative consequences for the economy and France's image abroad.

WHAT NEXT?

A source close to Bayrou said his government was open to negotiation on the details of his budget proposals, though they were adamant that a budget squeeze is necessary.

Bayrou said on Tuesday he would ask high-income taxpayers to make a special effort to help curb the deficit.

Bayrou knew a no-confidence vote would eventually be tabled over the budget and decided to get ahead of the opposition, the source said.

France's blue chip CAC40 index (.FCHI), opens new tab was down 1.5% on Tuesday, having fallen 1.6% late on Monday. Banking giants BNP Paribas (BNPP.PA), opens new tab and Societe Generale (SOGN.PA), opens new tab slid more than 6% each.

Meanwhile, 10-year French government bond yields briefly rose to 3.53%, the highest since March , before steadying at 3.50%. When a bond's yield rises, its price falls.

Source: Reuters

The U.S. has imposed a new 50% tariff on Indian-origin goods starting Wednesday, August 27. The tariff is a response by the Trump administration to India’s continued purchase of discounted Russian oil.

The U.S. Department of Homeland Security published a notice that the increased levies will apply to goods entered for consumption or withdrawn from a warehouse for consumption on or after 12:01 AM Eastern Daylight Time on August 27.

President Donald Trump argued that the measure is necessary to advance peace negotiations with Russia on Ukraine. He termed India’s trade with Russia as indirect funding of the Russian war on Ukraine.

Modi urges Indian citizens to prioritize Swadeshi goods amid the tariff hike

Indian Prime Minister Narendra Modi has strongly criticized the decision, speaking at an event in Ahmedabad today. He said that his administration will not compromise the interests of farmers, herders, and small-scale industries. He urged Indian citizens to rely on Swadeshi goods and declared that India would withstand external pressure.

Subrahmanyam Jaishankar, the Indian foreign minister, said that negotiations with the Trump administration are ongoing. He gave no hint about the halt of oil purchases from Russia.

Commerce ministry officials revealed that the government has little hope of immediate relief. They added that the government would offer financial support, including subsidies on bank loans and measures to diversify shipments to other markets.

Indian exporters are the most hit group with 55% of India’s $87 billion export market to the U.S. on the line. Some sectors expect losses as early as September.

The Engineering Exports Promotion Council revealed paused orders in anticipation of the hit. It also warned that competitors such as Vietnam, Bangladesh, and China stand to gain from the chaos. The government of India has identified several countries that need to shift their export focus to textiles, processed foods, leather, and marine products.

Local manufacturers have already begun feeling the strain, with Tiruppur, Tamil Nadu company that supplies almost a third of India’s garment export to the U.S., factories are slowing down due to reduced orders. Workers have been released some on unpaid indefinite leave in Surat, Gujarat, a diamond polishing hub, where industries operate partly throughout the month.

Factory owners have argued that, due to low output, some workers must be released pending market changes.

Trump warns that the tariff impact will extend beyond India to Europe and other countries

India exports at least 60% of shrimp to the U.S., but due to tariffs that may cross 60% once additional duties are included, it may force farmers to scale down on production. Some industry analysts have warned that the move threatens the livelihoods of people tied to aquaculture.

The Indian Rupee fell by 0.2% following the announcement to 87.75 per USD in the open market. Benchmark indices fell by about 0.7%. Some analysts have warned that the Indian economy may fall by nearly 0.8 percentage points this year and in 2026, even with domestic tax cuts in place.

Tariff negotiations between the two countries failed five times earlier this year. According to Indian officials, who could not disclose their identities due to the private nature of the negotiations, they had confidence that the tariff would be capped at 15%. The dispute escalated over U.S. demand for extra access to India’s agricultural market, which Modi has vowed to protect.

Modi has urged Indian citizens to prioritize self-reliance and adapt through rough times through diversification. He also committed to strengthening ties with Russia and China amid restrictions.

Source: CryptoSlate