Harry Wu, journalist for Southern Finance Omnimedia Corp (SFC)

The conflict between US President Donald Trump and the Fed chair Jerome Powell is becoming increasingly intense. According to CCTV News, Trump is considering appointing a "shadow chair" for the Fed before Powell leaves office next year to put pressure on the Fed to cut interest rates.

Rob Subbaraman, Head of Global Macro Research & Co-Head of Global Markets Research at Nomura, downplays Trump's threats to the Fed in an interview with SFC.

"Trump said that Federal Funds Rate should be 300 basis points lower and threatened to appoint a shadow chair. He has repeatedly stated that the Fed needs to cut interest rates due to low inflation," Subbaraman said. He noted that if US inflation picks up in the next three months, it will be difficult for Trump to blame Powell. 

"Trump could appoint a shadow Fed chair who could say that inflation has risen, but it's going to be a one off, and there will be a sharp interest rate cut next year. The market will also consider the views of the shadow chair, which will make the work of Powell and FOMC more difficult."

Subbaraman said since the US government is elected only for four years, there is a short term incentive to try to do as much as possible during this period, which may trigger inflation. "People want to have the Fed independent from the government and pay more attention to long term development, avoiding stimulating economic growth in the short term, otherwise it will lead to permanent inflation problems."

Although Trump has a very negative attitude towards the Fed, especially Powell, Subbaraman believed that it is difficult for Trump to influence the Fed's policies.

There's a lot of safeguard measures and a very strong institutional infrastructure in place that makes it difficult for the government to really take control over monetary policy, said Subbaraman.

"On the one hand, whoever Trump chooses has to be approved by the Senate. On the other hand, monetary policy is not determined solely by the Fed Chair. There are 19 members of the FOMC. And out of those 19, 12 of them are voters. Even if Trump appoints a chair who can act as he wishes, it is not clear whether this will be enough to influence the entire FOMC."

Looking forward, Subbaraman warned that when Powell leaves office next year, the Fed may usher in a new chair who is more consistent with Trump's position. Although the loss of independence of the Fed is not a base case, it is a bigger risk than it has been for decades. If it were to happen, it would be very unfavorable for the US economy and the market; inflation risks could increase; foreign investors could lose confidence in US assets; and long term interest rates would rise and the dollar would fall.