Trump started a match with the Fed he had zero chance of winning – now he's backwards

Reuters

President Donald Trump fought the Federal Reserve ̵[ads1]1; and the Fed won.

The president has the base Fed and his hand-picked chairman, Jay Powell, several times since the summer to raise interest rates. Wall Street largely took the president's criticism in contravention of Trump's opinion that he could burn Powell.

It did.

A frenzy of speculation about the president's intention accelerated a large sale on the stock markets in the days leading up to Christmas. Dow Jones Industrial Average

DJIA, + 4.98%

were on track to record their worst loss since the throes of the Great Recession in 1931 to Wednesday's sharp rally.

Opinion can be shared between economists and investors about how fast and how high the Fed should raise US interest rates, but one thing surely unites Wall Street: The Fed should be allowed to do its job without political interference.

On the heels of these big losses, Trump has beaten a rapid retreat. His two top financial advisers, Kevin Hassett and Larry Kudlow, have publicly stated that the President does not intend to take any action against Powell.

"The president has stated political differences with Jay Powell, but Jay Powell's job is 100% secure. The president has no intention of shooting Jay Powell," Hassett told the Wall Street Journal, a sister publication of MarketWatch.

Read: Is Fed Chief Jerome Powell Job Secured? Yes, 100%, says Trump aide Kevin Hassett

The White House reversal helped calm markets on Wednesday. The Dow increased about 1,086 points after an afternoon session.

Read: Public closure: What financial reports have been suspended?

Trump, for his part, still insists that the Fed increases interest rates too fast, but he calibrated his message.

Look, the Fed is raising prices, Trump said on Christmas Eve, because the economy is doing so well! And they will probably figure out the error in their paths very soon, the president suggested.

The president was quiet about the Fed on Wednesday, but mainly because he made a surprising visit to US soldiers in Iraq.

He's sure to find a kindergarten here than he wanted on Wall Street. The last thing investors want is that the White House or Congress should make monetary policy shots.

Independence is probably the hallmark of modern central bank. Take it away, and monetary policy is left to the vagaries of politicians who now and always tend to strongly favor simple money. It is a recipe for disaster, which is repeatedly shown by countries whose banks lack independence.

Although Trump was bold enough, he was extremely unlikely to succeed. The laws of the Fed suggest that a manager can only be fired for misconduct, not just to disagree with the president on interest rate policy.

Also, the President will not find any support in Congress. Most lawmakers may just as easily make money, but there has been no follow-up to support for Trump's attacks on Powell.

It probably doesn't have to be. The financial markets have made their views high and clear.

If there is one thing that is capable of making the business-defended president down, there is a decline in Wall Street. Trump can no longer boast about a floating stock market in light of the last fall from grace.

The Fed is not and should not be immune to criticism. The Fed has often been accused, and rightly so, of contributing to the start of recession by raising prices too high.

Nevertheless, the Fed has become the world's most powerful and influential central bank precisely because it is seen by investors around the world as an independent authority.

That reputation could be lost for good if the president was able to overcome the Fed – for long-term damage to the US economy.