As the prospect of a US recession grows ever closer, President Donald Trump is said to be seriously considering firing the Federal Reserve Chair Jerome Powell. This deep dive into Powell’s stance couldn’t be more timely. The U.S. economy today faces increasing risks from an impending recession, as well as escalating trade tensions with China. This alarming reality opens up key questions not just about the ongoing independence of the Federal Reserve. It further raises doubts about overall U.S. dollar stability.
The FOMC chair doesn’t even have to be the full Federal Reserve chair. This provides Trump with the opportunity to install someone more favorable to the monetary policy he desires should he choose to kick Powell out. Any new appointments would need to be confirmed by the Senate, introducing a whole new layer of complexity into the decision-making process.
The dollar has lost considerable ground in this recent period. Increasingly fraught trade relations with China have sent financial markets into a panic over the possibility of a recession. Analysts have noted that the dollar’s decline continues to be driven by concerns over the Fed’s independence amidst political pressures. These combined factors have recently contributed to the dollar reaching three-year lows, posing further downward pressure on the dollar’s value.
The euro has taken a hit too, with the weakening dollar sending the EUR/USD pair down toward the 1.1600 level. Market focus shifts to U.S. economic data, which should start to show at least some early signs of a slowdown. Traders use this data to judge the health of the U.S. economy. It further assists them in forecasting US Federal Reserve actions.
President Trump’s mercantilist, tariff policy has only added to the mess, harming trader sentiment and adding to the generalized economic malaise. Confidence in our economic stability seems increasingly discouraged. The Whitehouse’s Director of the National Economic Council, Kevin Hassett, recently admitted that Trump was looking into having Powell fired. It would represent a historic change in the leadership of the nation’s monetary policy.
UBS economist Paul Donovan highlighted the importance of central bank independence in maintaining economic stability:
“Arguably, the great moderation of inflation was driven by a trend toward central bank independence. While monetary policy is a relatively blunt weapon, it can be wielded to control medium-term inflation. This depends on trust in the central bank. Building that trust takes years. Losing that trust can happen overnight.” – Paul Donovan, UBS
The implications of such a move by Trump would be huge. In Washington, this unusual predicament puts Powell’s future in doubt. More than just giving permanent chipmunks a platform, it undermines the efficacy of monetary policy to address today’s greatest economic challenges. The Fed’s independence has historically been understood as the key to the institution’s credibility. It is this freedom that allows the Fed to operate independent and free from political pressure.
Traders hang on every economic data point. They are always on their toes because they realize that everything that Trump is doing could upend the entire U.S. monetary policy establishment. As trade conflicts spill into currency manipulation accusations, fears of a global recession are rising. The stakes are great for both the dollar and for the Federal Reserve’s independence and ability to react responsibly.