Trump vs Powell: Who will win? Gold emerges as haven in an uncertain financial world
It was a week of drama around interest rate decisions across the globe. The US Federal Reserve did not adhere to the Trump administration's calls to lower its bank rate and kept it unchanged. The expected decrease in the repo rate by South Africa’s Monetary Policy Committee (MPC) was announced and the European Central Bank (ECB) cut its ECB deposit rate by twenty-five basis points. The price of gold surged to a new record level as investors fled to it as a haven.
The US Fed argued that there is no need for a cut in rates now, as all the macroeconomic indicators, especially core inflation and the unemployment rate, are stable and well-balanced. As expected, US President Donald Trump poorly received the move. Shortly after the Fed announced its decision to hold rates steady on Wednesday, Trump reacted sharply, accusing the Federal Open Market Committee (FOMC) of failing “to stop the problem they created with inflation”, according to a post on Truth Social.
Rumours emerged immediately that Trump might fire the Fed’s chair Jerome Powell or try to gain direct control over interest rate decisions. Powell reacted by saying both actions would be illegal. Although the president appoints Federal Reserve chairs, their terms are set by statute. Therefore, the president does not have the authority to fire Powell. However, Trump could ask Powell to resign. This would deepen the clash between the two, as the Fed chair has already indicated that he has no intention of resigning. Powell's term expires at the end of 2026.
US stocks ended lower on Friday, with indexes starting to discount the indications given by the Trump administration that President Trump is due to implement last Saturday’s tariffs of 25% on Canadian and Mexican imports and 10% on Chinese goods.
The decision by the MPC to lower the repo rate by 25 basis points is controversial. Although the SA Reserve Bank’s Governor Lesetja Kganyago indicated during the press conference on Thursday that the lower core inflation rate of 3.0%, as well as expectations that the inflation rate will remain below the MPC’s midpoint target of 4.5% for some time, he warned that there are many global risks that may push the inflation rate quickly above 5.0%.
He said, “Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts.”
In this sense, the “Trump” effect may rapidly change the current scenario of a stronger rand, lower-than-midpoint inflation rate, and a repo rate that could accelerate quickly. Combined with the sharp increase in electricity prices by 12.5% in 2025 (three times higher than the core inflation rate) and expected rises in fuel prices, South African financial markets may be in for a rough time over the next six months.
The brave decision by the MPC last Wednesday, as well as the flight of investors to gold, boosted equity prices on the JSE last week. The gold price broke $2 800 (R52 278) per ounce for the first time on Friday and traded at $2 814 in intra-trade. The platinum price also traded above $1 000 per ounce at one stage on Friday. The All Share index ended Friday 2.0% higher than the previous week’s close, mostly driven by precious metals and resources. The Resources 10 index gained 3.7% last week, with financial stocks ending flat on a weaker rand. The rand depreciated against the dollar by 34 cents last week, closing at R18.67 against the dollar.
This coming week, investors around the globe await the Trump administration’s announcement on implementing tariffs against Mexico, Canada, and China. On Friday, the US will release the non-farm payroll data for January. It is expected that 170 000 new jobs were created last month and that the unemployment rate remained at 4.1%, in line with the Fed’s target. Many countries will publish various Purchasing Managers' Indices (PMIs) this coming week.
For South Africa, new vehicle sales for January will be released today, and the Reserve Bank will announce the level of South Africa’s foreign reserves on Friday. The Bank of England will release its latest interest rate decision on Thursday, with the expectation that it will cut its repo rate by 25 basis points.
Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.
BUSINESS REPORT