ORLANDO, Florida, July 21 (Reuters) - TRADING DAY

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By Jamie McGeever, Markets Columnist

U.S. and world stocks posted solid gains on Monday as the dollar and bond yields fell, while encouraging corporate earnings and investor optimism that the economic damage from tariffs won't be too severe also boosted risk appetite.

More on that below. In my column today I look at U.S. President Donald Trump's attacks on Fed Chair Jerome Powell in the broader context of U.S. and global central bank independence.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

Today's Key Market Moves

Equity optimism hard to quell

Equity investors have the bit between their teeth. Despite huge uncertainty surrounding U.S. tariffs and trade deals, and unease about Trump's tirades against Powell, stocks continue to march higher.

Monday's whoosh was supported by solid U.S. corporate earnings, a weaker dollar and lower Treasury yields. Investors also continue to bet that the economic damage from tariffs will be milder than feared.

U.S. Commerce Secretary Howard Lutnick said on Sunday he was confident of securing a trade deal with the European Union, even as the EU explored possible counter-measures against the United States.

Trump has threatened 30% tariffs on imports from Mexico and the EU, and sent letters to other trading partners, including Canada, Japan and Brazil, setting tariffs ranging from 20% to 50%. This has led experts to raise their running effective aggregate U.S. tariff rate estimates to near 20%.

That would be the highest since 1933 and around eight times higher than they were at the end of last year, although sharply down from the April 2 Liberation Day extremes.

Right now, investors are shrugging this off, and one can understand why. Trump quickly climbed down after the post-Liberation Day market volatility, the August 1 deadline may be pushed back, and the final tariff rates could be different from those announced.

U.S. economic data and second-quarter earnings are generally beating forecasts too. Even if that is because consumers and businesses have, to varying degrees frontloaded purchases, sales or production ahead of the final tariffs, the incoming numbers are solid.

Citi's U.S. economic surprises index has been rising steadily for the past month, albeit from deeply negative territory, while the equivalent European surprises index is flat-lining and China's has been falling.

Meanwhile, Japan's markets reopen on Tuesday after Monday's holiday, giving stock and bond investors their first chance to react to Sunday's upper house election which saw the ruling coalition lose its majority. Prime Minister Shigeru Ishiba has vowed to stay in situ, citing the looming August 1 tariff deadline with the United States.

Nikkei futures are currently pointing to a flat open on Tuesday.

Trump's Fed attacks puncture veneer of central bank independence

If U.S. President Donald Trump's public attacks on Federal Reserve Chair Jerome Powell have achieved one thing, it has been to thrust the issue of central bank independence firmly into the spotlight. But this raises the question, what does 'independence' really mean?

Central bank independence is widely considered a bedrock of modern-day financial markets. Economists, investors and policymakers almost universally agree that monetary policy should be set for the long-term good and stability of the economy, free from short-term and capricious political influence.

But maintaining that theoretical separation between policymakers and politicians is very challenging in practice.

Ultimately, central banks are creations of – and, to varying degrees, extensions of – their national governments. The legislatures determine their statutes, parameters, goals, and key policymaking personnel.

One need only look at the intertwined and often coordinated responses of countries' central banks and governments to the global financial crisis and pandemic for evidence that complete independence doesn't actually exist.

DE FACTO OR DE JURE

'Independence' has two primary meanings in studies of monetary policy.

Academic studies often refer to 'de jure' independence, essentially legal or institutional independence, and 'de facto' or operational independence. Importantly, de jure independence is no guarantee of de facto independence or vice versa.

Perhaps surprisingly, the U.S. scores pretty low on a de jure basis, mainly because the Fed's statutes have barely changed since it was created over a century ago in 1913.

Davide Romelli, associate professor at Trinity College Dublin, has updated a central bank independence index created by Alex Cukierman, Steven Webb, and Bilin Neyapti in the 1990s. The index, in which 0 is no independence and 1 is total independence, shows the US scoring 0.61. That suggests the Fed is a less institutionally independent body than the European Central Bank, which scored 0.90, and even the People's Bank of China, which scored 0.66.

But on a de facto basis, the Fed would almost certainly rank as higher than the PBOC, given its design, transparency, and accountability mechanisms such as the chair's regular press conferences and appearances before Congress.

And look at how the Fed resisted the clamor to raise interest rates when inflation first exploded after the pandemic as well as its patience in lowering them now given the uncertainty surrounding the U.S. trade agenda. You can argue the wisdom or folly of the Fed's actions in either case, but both episodes put its operational independence on full display.

'BANANA REPUBLIC'

When experts talk about threats to central bank independence, they are usually referring to concerns about de facto independence.

Indeed, this is why Fed-watchers have grown increasingly troubled by Trump's excoriating verbal attacks on Powell over the last six months for not cutting interest rates. If there is a line demarcating political interference, however amorphous, Trump has crossed it.

"The words that Trump uttered are the ones one expects from the head of a banana republic that is about to start printing money to fund fiscal deficits," former Fed Chair and U.S. Treasury Secretary Janet Yellen told The New Yorker earlier this month.

Of course, even if Trump were to replace Powell with a more amenable chair, this would not completely eliminate Fed independence. The Fed chair does not single-handedly set interest rates and represents only one of 12 votes at each policy meeting.

But in many ways he or she is the first among equals, as University of Maryland's Thomas Drechsel shows in a recent working paper.

Analyzing over 800 personal interactions between Fed officials and each U.S. president from Franklin D. Roosevelt to Barack Obama in 2016, Drechsel found that 92% were with the Fed chair. President Richard Nixon interacted with Fed officials 160 times, reflecting his infamous efforts to influence then chair Arthur Burns, while only six interactions took place during Bill Clinton's two terms.

To be sure, not all meetings or telephone calls involve political pressure, and for purely logistical reasons, it makes sense that the president would prioritize speaking with the head of the monetary policy body as opposed to all its members.

As such, appointing the governor is a key area where a central bank's independence can be damaged. In a 2022 academic paper titled "(In)dependent Central Banks" revised in February analyzing 317 governor appointments in 57 countries between January 1985 and January 2020, the authors noted that as central banks' powers – and perceived independence – have expanded, political incentives to control them have intensified, "especially in an era of growing global populism."

Thus, in many cases, the more power a central bank has to ignore political pressure, the more motivated government leaders are to apply it. If that is a global trend, Trump appears to be at the vanguard.

What could move markets tomorrow?

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https://www.reuters.com/world/china/global-markets-trading-day-2025-07-21/