Comment

John Hewson
What can the RBA do about Trump?

As United States President Donald Trump’s tariffs unleash chaos and turmoil across global markets, financial authorities around the world are forced into the unenviable role of working out how to protect their economies.At such an unpredictable juncture, with the leader of the world’s largest economy going rogue, who would want to be a central banker?

The risks of a recession in the US and globally are now very real, as are the prospects of increasing inflation, again both in the US and globally. Stock indexes around the world are in turmoil not seen since the Covid-19 pandemic’s early days, major currencies including our own have weakened, and even supposedly low-risk US government bonds have fallen sharply. More volatility can be expected as the effects of an erratic trade war flow through.

The challenge is to head off a growth downturn and the rekindling of inflation – the especially wretched combination known as stagflation – without precipitating a recession with rising unemployment. It’s a very narrow path to success.

Treasurer Jim Chalmers took the opportunity of last week’s market upheaval, in the midst of the election campaign, to gather the country’s financial leaders in a round of emergency meetings. The question remains as to what they can do, and indeed the exact nature of the threat they will need to respond to, as the situation continues to change.

Former Reserve Bank of Australia governor Bernie Fraser said in a recent ABC RN Breakfast interview that what has happened in financial markets and more broadly in the real economy this month was entirely predictable. US stocks have been seriously overvalued for some time, and the market reactions to these latest tariffs were foreshadowed in Trump’s first term. Research from the Federal Reserve Bank of New York and Columbia University suggests that the 2018 trade war with China cost US companies as much as $1.7 trillion in sharemarket losses, alongside other negative effects on the US economy.

A central bank has a dual responsibility to not only respond to circumstances as they unfold but also to think and analyse ahead, to anticipate and prepare.

I agree with the comments by Bernie Fraser that the RBA tends to be late – at least by international standards – in the interest rate game. It was late to begin the tightening in 2022, after having kept rates too low for too long, and was then late with this February’s easing of policy, even though economic growth has been anaemic.

The incomplete internal reform of the RBA has probably complicated its processes, especially as the full advice of the review committee from March 2023 has not been adopted. The recommended split of the single board into a governance board and a specialised monetary policy board was effected, but only a couple of monetary policy experts were added to the latter, rather than a full board of experts for a fresh start.

Fraser’s specific advice was for Governor Michele Bullock to call an emergency board meeting ahead of its next scheduled meeting on May 20, to deliver a 50 basis point cut to the cash rate as a sort of “catch-up” for the bank’s delay in lowering interest rates as growth has slowed.

That said, such dramatic action would require the bank to closely monitor any sign of rebuilding price pressures, as consumer price inflation has only just returned to the bank’s target range of 2-3 per cent, following four years of excessive increases. Given all the volatility Trump is creating, pushing up the cost of imports with the highest US tariffs on record, any interest-rate reductions could be quite short-lived. Against this unpredictable backdrop, consumers and businesses would still be left hanging, unwilling to spend and unable to plan, facing a most uncertain future.

Meanwhile, we are all paying the price for Trump’s ignorant and reckless arrogance in a loss of savings, as the market upheaval erodes people’s superannuation holdings, jeopardising many retirement plans.

A particularly disturbing recent development has been the hesitancy of some of the biggest participants in the global financial markets to express their honest assessments of the events as they have unfolded, fearing Trump’s reaction, as the president has tended to threaten revenge against those who have spoken out against him and his administration. One example of this fear has been the market commentary by leading investment bank JPMorgan Chase and Co, which has notably put the chance of a recession in the US at 60 per cent. The bank’s chief strategist recently released an economic report titled “Redacted: Straight talk from the CEO front lines on Liberation Day”, in which he blacked out several passages. This followed a private client presentation in which he called the president’s plan a “sledgehammer, brute force” approach. “People are being held accountable for their views and the things they say in ways that they probably shouldn’t be,” Michael Cembalest, the chairman of market and investment strategy for J.P. Morgan Asset Management, said on the call.

It is disturbing how many people in the media have attempted to declare “genius” behind all of Trump’s decisions, implying that his irresponsible actions have a clever, undeclared agenda. Meanwhile, he boasts about the leaders of countries coming “to kiss his ass” in the hope of a deal. He appears also to have manipulated the sharemarket, by posting an alert on his social media platform declaring it was a “great time to buy” just hours before he announced a pause in tariffs that sparked a massive market rebound – a form of “crony capitalism” that may well have benefited both him and his billionaire mates. Genius it certainly is not, just a corrupt process.

The next predictable shock to financial markets would be any attempt by Trump to fulfil another of his election commitments: to undermine the independence of the US Federal Reserve. There were early signs of this recently when he attacked Fed chairman Jerome Powell – his own appointee – by criticising his laxness in responding to the emerging threat of a recession in the US. Trump has called for the Fed to lower interest rates more quickly.

Trump is yet to explain how he intends to dictate to the central bank. Some seem to think he may simply remove Powell, to replace him with another sycophantic mate, as the president has done with most cabinet portfolios thus far. Or he may seek to engage the White House directly in all Fed initiatives, in order to control its decisions.

There should be little doubt about just how disruptive such action would be for US markets, and the global spillover.

Bernie Fraser also made the key point that central banks must not be swayed by domestic politics, nor seek to engage in them. Rather, they should do what they think – on the basis of the best evidence and experience – is required under the economic and market circumstances, irrespective of any political consequences.

The main concern with a Trump intervention to hold down US interest rates is that, in his desire to prevent a recession, he would be embracing the inflationary consequences of his tariffs. So much for his commitments in regard to the cost of living.

The serious danger in Trump’s mismanagement of the US economy is that he risks undermining the integrity of the US financial system and trust therein. This would have serious consequences for the standing of the US dollar, which for so long has been the base of the global finance and trading system.

Most of the major central banks have enjoyed some success over the past year in containing inflation – and several have begun lowering interest rates – only to find themselves facing massive global trade disruptions and the threat of a global recession. They must decide whether they will move fast to protect growth, by accelerating interest rate reductions, and thereby risk a resurgence of inflation.

Some intervention by the US central bank is possible given the recent worrying signs in the US Treasury bond market, where long-term rates have risen as prices of these so-called risk-free assets have slumped. Powell may need to act to stabilise the market and prevent a damaging spike in American borrowing costs.

Our Reserve Bank is in the unenviable position of having to manage these potential shocks in the context of an election. Even if it does the right thing in terms of the unfolding impacts globally and on our economy, there’s a significant risk that the policy moves will be judged through a political lens and assumed to be helping the government. That, too, would have undesirable side effects, making the RBA’s task to ward off a crisis even tougher.

It’s a tough time to be the adult in the room.

This article was first published in the print edition of The Saturday Paper on April 19, 2025 as "What can the RBA do about Trump?".

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