A Market View of What Happens if Trump Fires Fed Chairman Powell

A Market View of What Happens if Trump Fires Fed Chairman Powell

Talking Points:

• US President Donald Trump has voiced frequent discontent over Fed Chairman Jerome Powell and the group’s refusal to lower rates
• US benchmark rates are higher than all of their major counterparts, but the central bank is concerned about potential resurgent inflation pressures
• Discussion of the legality of firing Powell or the possibility of his retiring early abound, but would a new chair lead to imminent rate cuts?

What Economic Theory Does President Trump Subscribe To?

What Happens if Trump Fires Fed Chairman Powell? – The drum of criticism keeps rolling. US President Donald Trump was unrelenting in voicing his displeasure with Jerome Powell and the Federal Reserve through this past week, and it should be expected that he won’t let up heading into the July 30th FOMC rate decision. Despite a number of headlines and policies on the President’s radar, he took the time to opine in social media and in press conferences that he believed the central bank has fallen behind a need to drastically lower interest rates. He reiterated this after multiple macroeconomic updates last week, suggesting both that the conditions reflected were ideal and that there is an urgent need to offer financial relief through policy easing.

 

A charitable interpretation could be that Trump is concerned that tight monetary conditions could throttle the economic tempo, but that doesn’t align to the call for massive a 200 basis point (bp) reduction. More likely, the President isn’t familiar with the traditional academic views on global monetary policy and central banking which suggest sharp reductions can translate into a strong inflation pressure which upends the Fed’s stated dual mandate between steady price growth and full natural employment. And, with his signature financial bill expected to sharply increase debt beyond its already-record high, rapid growth is a necessary income driver. Further, reducing the prime rate can further reduce prevailing Treasuries yields (government borrowing costs), but rolling to cheaper paper isn’t likely to be as smooth as many likely think.

Chart of DXY Dollar Index and Major Central Banks’ Benchmark Rates (Monthly)

Source: TradingView, ICE, Federal Reserve Economic Database

The Threats Escalate but Markets are Slow to Believe

As we are entering the media blackout period preceding an official rate decision (two weekends before the two-day meeting begins), we normally wouldn’t expect any policy remarks from either Chairman Powell or any other central bankers. However, the circumstances are quite different form the norm and all bets should be considered ‘off’. Powell has generally avoided trading barbs with – or meaningfully trying to mount a defense against – the President’s aspersions, but the independence of the Fed seems to be increasingly called into question in market circles.

Further, a few emboldened dissenters (particularly Waller and Bowman) have been remarkably aggressive in their diversion from the consensus with outright suggestions of justification for cuts at this month’s meeting; which could indicate they are taking the opportunity to break from the view of a strong house view at the Fed. It is easy to think that Trump is just ‘jawboning’ or that the market is confident that he couldn’t remove the Chairman even if he wanted to so there is little-to-no market response threat. Yet, the volatility we saw last week to stories that the President was asking GOP leaders if they thought he should remove Powell triggered a strong move in the US Dollar. The President later said he wasn’t considering firing him.

DXY Dollar Index Overlaid with Futures Implied Rate Change Before and After Powell Term

Source: John Kicklighter, TradingView, ICE

Powell Isn’t the Sole Shot Caller on the Fed

Given his level of discontent with Powell, it is very likely that he has at least directed his team to look at means for removing him before his May 2026 term is up – in case the public shaming isn’t enough to get the Chairman to quit. The legality and legislative support of such a move is difficult to pin down, but it is worth considering the extreme scenario. Senator Elizabeth Warren suggested that firing Powell would see the market ‘crash’. I don’t think that would be the case. There is very little virtue in the collective market’s speculative appetites, and lower rates has historically fuelled capital market appreciation as more funds pumped into the system seek yield – and its hard to beat capital gains like those seen from the S&P 500’s climb.

As far as a replacement that is fully aligned with the President getting to work on policy, the doves are the minority; and those calling for cuts are further outliers. Even with a new leader, there isn’t currently support across the committee for even a -25bp cut – much less the -200 bps Trump expects. That said, while the erosion behind the Dollar may be slower, it could likely be more permanent in the loss of credibility as a fully risk-free benchmark (with Treasuries backing it) given the haven was even more open to political pressure rather than pure economic and market influences. That would be a serious, long-term issue with sovereign credit downgrades and gradual international divestment….but it would likely be slow.

Table of Federal Reserve Committee Members and Regional Presidents with Policy Standing

Source: John Kicklighter

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-- Written by John Kicklighter, Global Head of Content