The Reserve Bank of Australia could face pressure to cut interest rates if Donald Trump succeeds in taking control of the US Federal Reserve, economists have warned. The US Supreme Court is set to hear arguments in a case that could determine whether the president has the power to fire a Fed board member, following a criminal investigation into Fed chair Jerome Powell.
National Australia Bank chief economist Sally Auld said that if the court upholds Trump's efforts, it could spell the end of the central bank's independence. A loss of confidence in US monetary policy could lead to a significant depreciation of the US dollar, potentially forcing the RBA to cut rates to counter a sharp rise in the Australian dollar.
AMP chief economist Shane Oliver echoed these concerns, warning that a politically controlled Fed could keep rates low, leading to an inflation blowout that would smash the US dollar and drive Wall Street lower. He noted that if Trump gains control of four of the seven Fed governors, the guardrails around the central bank would weaken.
Both economists believe that a stronger Australian dollar and lower interest rates could result, but with the risk of higher inflation. Oliver added that Trump's push to overturn central bank independence would set a precedent for populists globally, including in Australia, where institutional settings are already weaker than the Fed's.
The Greens have already called for the government to override the RBA, while some Liberal figures may follow Trump's lead. Unions remain critical of the RBA's rate stance but still support its independence. The Fed's next rate decision is due on 29 January, the first under the shadow of the criminal investigation into Powell.
