De Centrale Bankier en de Rechter

De terugtrekking van president Trump van eerdere uitspraken over het "ontslaan" van J. Powell bij de Fed heeft de markten enigszins gekalmeerd, maar wij denken niet dat de zaak daarmee is afgerond. Mogelijk nog voor het zomerreces zal het Hooggerechtshof uitspraak doen over het ontslag van functionarissen bij andere onafhankelijke federale agentschappen, wat grote gevolgen kan hebben voor de Fed. Als de rechtbank ontslag om beleidsgeschillen mogelijk maakt – iets wat sinds 1935 niet kan – dan zou zelfs het risico op ontslag de onafhankelijkheid van de centrale bank ondermijnen, ook als de president daar geen gebruik van maakt. Bevestigt het Hof echter de sterke bescherming die de Fed-leiding geniet, dan zullen invloeden via benoemingen minder verstrekkende gevolgen hebben: naast J. Powell hoeft slechts één ander bestuurslid vóór eind 2028 vervangen te worden. De commissie zou dan grotendeels blijven bestaan uit "oude" gouverneurs en de voorzitters van de regionale Feds – die niet door de president worden benoemd. Toch, los van de beslissing van het Hof, verschuift het denken over overheid in de VS. Het traditionele debat tussen "grote" en "kleine" overheid maakt plaats voor een discussie tussen "vrije" en "ingeperkte" overheid, met gevolgen voor de voorspelbaarheid van het beleid in de VS en de status van de dollar als dominante risicovrije activa.

Het zal de komende maanden bijzonder lastig zijn om de Amerikaanse economie te interpreteren, door tactisch gedrag rond importtiming, voorraadbeheer en marges, wat het beeld vertroebelt. De publicatie van het BBP over het eerste kwartaal deze week zal echter richting geven – wij verwachten een positieve, maar zwakke groei (+0,5% op jaarbasis). Toch blijft voor de Fed op korte termijn vooral de arbeidsmarkt van belang. Het lijkt erop dat de impact van het hardere immigratiebeleid al merkbaar is in moeilijkere wervingen: een lagere banengroei zal de looninflatie mogelijk niet snel verlichten. Het werkgelegenheidsrapport van april, dat vrijdag verschijnt, kan hier meer duidelijkheid over geven. Ondertussen tonen de laatste Europese ondernemersvertrouwenscijfers enige veerkracht, vooral in Frankrijk, maar vanaf zo'n laag uitgangspunt dat de boodschap niet echt geruststellend is.

The fight over the Fed is the key test

The market is expecting significant Federal Reserve (Fed) cuts by the end of this year (85bps), reflected in the drop in 2-year yields which, together with the widening in corporate spreads, suggests that investors take seriously the risks of a recession in the US triggered by the new trade war. However, long-term treasury yields have been resilient (see Exhibit 1). This counter-intuitive steepening of the US curve in pre-recession times strongly hint at the emergence of a substantial risk premium on US government bonds. Issues of a technical nature, e.g. the growing share of US Treasuries held by Hedge Funds in the context of base trades, have magnified the tension on the long-end of the curve by triggering counter-productive gyrations in market liquidity, but the root cause lies outside the “plumbing” of the US financial system. Expectations of a further drift in fiscal deficits are probably playing a role, but doubts on the Fed’s future independence, and consequently the possibility to see the normally one-off price shock turns into persistent inflation, are dominant in our view. A generic distrust for US assets is also manifest in the divergence between the spread between US and German 2-year yields and the exchange rate. In normal circumstances, the spread – strongly influenced by relative expectations on the trajectories of the Fed and the European Central Bank (ECB) – is a good predictor of the Euro/dollar. However, over the last few weeks, while the market expects more cuts from the ECB than from the Fed – which is logical given the absence of a conflict of objectives on the European side, since the shock there is disinflationary – the Euro has continued to appreciate (see Exhibit 2).

Tension eased on the market after Donald Trump stated last week that he had “no intention to fire” Jerome Powell, backtracking from his earlier comment on his “termination.” We suspect however that this is not the end of that story. In our view, the conflict over the Fed’s independence is a symptom of a profound shift in how the government is conceived in the United States, rather than simply reflecting a divergence of views between the White House and the Fed on how monetary policy should respond to a tariff shock. The old dividing line between advocates of “big government” and “lean government” is morphing into a divide between “free government” and “restrained government,” which could put the US institutional system and political culture further away from the European approach. To explore this, we will for a bit stray away from our usual economic remit to delve into legal considerations.

Early termination of the Fed chairperson was “in principle” not on the cards under the prevailing state of US Law, and this is what prompted Jerome Powell’s initial answer, when he was quizzed about this, that it was “not permitted under the law.” Indeed, since a 1935 Supreme Court decision (in the “Humphrey Executor” case), chairpersons of independent government bodies were protected against termination for reasons of political disagreements with the White House. They could only be fired “for cause,” e.g. gross negligence. This created an important limit against potential overreach by the government. At the time when, under Roosevelt’s New Deal, “big government” was emerging, the Supreme Court, by curtailing the capacity of the President to influence independent bodies, re-created a form of “checks and balances” within the Executive branch.

Yet, the Trump administration is testing the power of this precedent and terminated officials from the National Labor Relations Board and the Merit Systems Protection Board. To quote directly from the Department of Justice in this case, “The president should not be forced to delegate his executive power to agency heads who are demonstrably at odds with the administration's policy objectives for a single day.” This was precisely the justification for Humphrey’s dismissal by Roosevelt in the 1935 case. These officials sued the government, and the case was “running its course” through the federal courts when the decision by the D.C Circuit Court to reinstate these two officials was suspended in early April by the Supreme Court, which will now examine the substance of the case. Based on Supreme Court practices when a “stay” was ordered, a decision could come by the end of June or early July (before their summer recess). This made Donald Trump’s initial threat about “terminating Powell” more substantial.

Even if the US President has backtracked on his intention to fire J. Powell – probably reacting to the steep deterioration in market conditions – the Court decision will still matter enormously. Indeed, even the mere risk that leaders of the Fed could in the future be subject to removal on political grounds would dent the independence of the central bank, with ramifications for the credibility of the Fed in its readiness to deliver price stability.

Some concerned observers highlight the growing popularity among Justices of the “Unitary Executive” theory. This reading of the Constitution considers that all executive power in the US government is vested solely in the President, which entails a complete control over the entire executive branch, including the power to direct or remove officials in charge of independent bodies. Perhaps counter-intuitively, conservative members of the Supreme Court are particularly attracted to that theory even though it could be seen as opening the door to “bigger government.” To some extent, this can be explained by the dominance of the originalist reading of the Constitution among conservatives: the Constitution’s text makes it plain that “the executive power shall be vested in a President.” But another reason is precisely a desire to repel the encroachment of “big government” and restore proper separation of powers and democratic accountability. Indeed, with the proliferation of independent authorities seen as unaccountable, the capacity of Congress to exert its control over the executive branch diminishes, and ultimately the capacity of the will of the people to control policy, for instance via the election of the President, erodes.

Outside the legal issues themselves, from a purely political point of view, the temptation to reinforce the power of the President can also be explained by a reaction to the growing difficulty of getting things done via Congress as polarisation gets rife. While the recourse to executive orders as the primary expression of presidential authority is specific to the Trump’s administration(s), there has been a clear trend in unilateral action by US Presidents well before he came to power beyond executive orders (e.g. the proliferation of presidential memoranda or national security directives).

Yet, in the current configuration, the extension of the power of the President – which the implementation of the “unitary executive” theory would allow – would weaken checks and balances within the whole US institutional system since the legislative branch of government does not seem too keen on exercising the full scope of its constitutional power. A very recent episode illustrates this: a “simple” act of Congress would have sufficed to restrain the President’s use of executive orders to conduct his trade policies, but reaching the required majority for this, despite the support of a few Republican Senators, has proved so far unsuccessful.

All this has a bearing on how the market views the status of the US as the main provider of safe assets. Investors had become accustomed to a slow and relatively predictable policymaking machine, with a large measure of checks and balances within the executive branch. An independent central bank would act as a natural limit to excessive fiscal shifts and unsustainable policies. Seen from the current administration’s point of view, this is a recipe for paralysis, at a time when the competition with China calls for a nimbler executive branch. Yet, the cost of such “free government,” with strong presidential capacity for action, is an “unrestrained government,” with more radical changes and policy signals. The possibility to see – just like in the 1970s – the return of all-out accommodative policy stances, with both fiscal and monetary policy stimulating the economy despite inflationary pressure, would probably spook the market.

Still, it remains far from obvious that even the Justices of the Supreme Court attracted to the “unitary executive” theory will create the conditions for a “termination right” of the Fed leaders granted to the US President. True, in 2020, the Court stated that the impossibility to fire the Director of the Consumer Financial Protection Bureau (CFPB) was unconstitutional. However, the CFPB is led by a single director, not by a committee – like the Fed – and the Court in its ruling explicitly mentioned this feature as a reason to allow termination. Besides, upon ruling on the National Labor Relations Board – a committee-led body – even if it found in favour of the President’s view, the Supreme Court could easily add considerations which would make it plain that, given the Fed’s particular nature – independence is absolutely essential to the fulfilment of its mission – would still keep it protected. ​

If ultimately the Court protects the Fed’s independence, the current administration will still have the possibility to affect the Fed’s course when the mandate of current officials ends. Jerome Powell’s mandate as Chair ends in May 2026 – even if he will remain member of the board of Governors until 2028 - and another position at the board of governors will also become vacant before the end of the current presidential term (Adriana Kugler, in January 2026). Still, influencing monetary policy via nominations at a committee-led institution is much less radical. The risk would be more that FOMC decisions become routinely split – with some damage to the central bank’s predictability – rather than obviously set into a completely different direction (local Federal Reserve Banks Presidents – who are not appointed by the President - and the “old” members of the Federal Reserve Board would still hold a majority relative to new appointees). This makes the Court decision on the National Labor Relations Board and the Merit Systems Protection Board even more crucial to the White House: ​ if the ramifications of the case make it impossible to terminate Fed officials before the end of their term, the US administration will likely need to count with a combative Fed beyond the end of J. Powell’s term as chairman. The key issue for us is not that the Fed would refuse to ease (we expect substantial cuts in the second half of 2025, in line with market expectations) but that the FOMC could be reluctant to go very deep into accommodative territory (i.e. below 3%, currently forecasted by the median FOMC member as the appropriate long-term level of the Fed Funds rate).

When will it show?

For now, the Fed is unlikely to drop its guard on inflation as long as the adverse effects of the tariffs on activity – which would ultimately prevent the price shock from turning persistent – do not materialise in hard data. A first signal could come in the first estimate for Q1 GDP, to be released this week on Wednesday. Given the poor showing of consumption over the first two months of the year, a mediocre performance is likely – we expect 0.5% in annualised terms (consensus is at 0.4%) from 2.4% in Q4 2024. The decent retail sales print for March provided some measure of reassurance that GDP growth could remain positive, but a downside surprise cannot be discarded: the latest GDP Nowcast – stripping the impact from trade in gold - from the Atlanta Fed for Q1 stood at -0.4%. ​

In any case, reading the US economy is going to be difficult for a long while given the turmoil triggered by the trade war. Indeed, Imports were ascending as businesses were trying to “beat the tariffs” – with as corollary a rise in inventories - but consumers also probably tried to provision for a well-telegraphed piece shock – the latter effect probably explains the rebound in retail sales in March. Yet, the latest shipping data suggests that this was already fading last month: the year-and-year change in container activity in the port of Los Angeles stood at +4% yoy in March, markedly down +24% in December, a recent peak (see Exhibit 3). Expectations of tariff cuts in the future, if negotiations appear to make better progress than currently expected, could also result in tactical timing of shipments to try to avoid a peak in tariffs – with potential disruptions to the supply lines. Reading inflation data will also be difficult. Indeed, some US producers relying on foreign inputs but now working down inventories accumulated before the tariff shock are likely to postpone the moment they have to pass the shock to their final consumers. Ford Motors for instance has stated its intention to revise its price lists for cars hitting the dealerships in early June. However, operators with less inventory capacity and faced with the particularly high tariffs on Chinese products may move fast – this the case for Shein for instance, which has just announced steep price revisions on the US market.

To add to the complexity of the current situation, there could be for several months a discrepancy between output and employment. Even if the US labour market reacts faster than in Europe to changes in the pace of production, there is still a lag. Weekly data for unemployment claims have not picked up yet. We will know more at the end of this week with the publication of the Employment report for April, and we will focus on the details for the sectors which are coming under direct stress (e.g. hospitality, given the steep fall in international tourism already obvious in the airlines data), but crucially, even if we see a slowdown in hiring, this would be only one side of the problem for the Fed, given the ongoing downward pressure on labour supply, which could leave still quite some measure on pressure on wages.

Watch the border…

Since “Liberation Day,” the market is understandably focused on the trade war, but there is another brewing supply-side shock which needs monitoring: the crackdown on immigration. While the “hard” labour market metrics take time to reflect demographic changes – estimating immigration numbers is notoriously difficult, hence the repeated large revisions in the available figures – Border Patrol activity can be a good proxy. According to the Department of Homeland Security, the number of “encounters” on the South-West border – basically the number of people suspected of attempting to cross illegally into the US met by Law enforcement officials - continued to collapse in March to reach their lowest level since the series was started in 2011. The crackdown had started in the second half of Joe Biden’s term, but the decline since January 2025 has been impressive (see Exhibit 4).

It may well be that the drastic fall in immigration flows is already starting to re-create some tension on the US labour market. The signals are still faint, but in the survey of small businesses conducted by the NFIB (National Federation of Independent Businesses) hiring difficulties – “positions not able to fill now” – hit a recent trough at 0.3 standard deviations above their long-term average in September 2024. The rebound in February and March 2025 was noticeable (0.6 and 0.8 respectively). This is still far from the peak seen in the post-Covid reopening (1.9 in May 2022) but the rebound in hiring difficulties, coinciding with the further drop in immigration, jars with the general observation of a cooling labour market. This supply-side shock to the labour market is one of the reasons why it is going to be difficult for the Fed to be pre-emptive in its support.

Meanwhile, in Europe…

The latest European business surveys were met with some surprise, as they failed to signal a significant further deterioration despite the bombardment of bad news on the trade war front. In France, the INSEE survey for the manufacturing sector – normally the first hit by an adverse shock on external demand – even improved in April relative to March, both for the headline index and for the export orders’ component (see Exhibit 5).

The responses were collected between 27 March and 22 April, and that according to INSEE most businesses respond within the first two weeks. Some of the specific effect of “Liberation Day” on 2 April may thus have been missed. In addition, while the precise numbers were not known, it was clear since D. Trump’s re-election that tariffs would rise, and over the last few months the export orders component had already softened significantly. Besides, French manufacturing, more “Euro-centric” than in Germany or Italy, is less sensitive to developments in the US. There was a strong positive contribution to the overall resilience in business survey from the car industry, which in the French case is largely immune to transatlantic developments and which is benefitting from the success of recent new models – especially EVs – on the European market.

The German IFO survey for April was less surprising, since the “expected export business” component relapsed, but we note that it is still close to the range established since the beginning of 2024 (between 1 and 2 standard deviations below the long-term average, see Exhibit 6), as if there was little reaction to the very latest announcements from Washington DC.

We do not think we should take that much comfort from the relative resilience in the latest European surveys. Some of the “bad winds” blowing from American were already “priced in” in the already deteriorated level of business confidence, and even if the negotiations conclude favourably for the EU – which we would define realistically as the permanent cancellation of the “add on” of 10% of top of the basic 10% “reciprocal tariff and some sector-specific carve-outs – the appreciation in the euro and the likely unavoidable decline in world trade would in any case dent an already mediocre outlook. We maintain our view that the French economy will be hit in a “second wave” of the tariff shock, when its exports to neighbours with stronger dependence on the US market (Germany, Italy) will suffer.