Former President Donald Trump escalated his feud with the Federal Reserve last week when he bashed its top official, Jerome Powell, on social media. Trump called for lower interest rates, a move that he believes would stimulate the economy. His comments have sparked new speculation about a potential bid to remove Powell. This proposal alone could spark a substantial market response.
The remarks mark a major softening up of President Trump’s ongoing vendetta against Powell, which included a string of vicious attacks when Powell was still in office. Market analysts noted that Trump’s comments appeared to have direct downward pressure on U.S. assets. This effect helped to drive the dollar down to its lowest value in three years earlier this week. These developments raise concerns about the stability of the financial markets and the potential ramifications of any presidential actions regarding the Fed.
Krishna Guha, vice chairman at Evercore ISI, reported on the developing state of affairs. He warned though that if Trump takes the hint and moves to get rid of Powell, we might witness an abrupt stock and bond market sell-off. We considered the independence of the Federal Reserve, Guha said, and this raises the stakes for any cuts they would consider. This careful examination raises the bar for their deliberations. If you try and toss the guy who runs the Federal Reserve, look for an immediate and violent reaction from the markets. Yields will spike, the dollar will decline and equities head south.
Trump making an aggressive move to oust Powell has been a persistent rumor in Washington, stoked by the former president’s blistering public rebukes. Powell stoutly disputes that Trump has any legal authority to fire him from his job as chair of the Federal Reserve. Unfortunately, he has made a habit of undermining this position. This independence is essential to continuing confidence in the market and having monetary policy that can be run beyond political episodes.
As Powell’s term as Fed Chair is set to conclude next year, the White House may need to reconsider its stance. Guha had urged the administration to allow Powell to complete his term. He contended that this would avoid needless turmoil that would result from a firing. He remarked that it is “strongly in the administration’s interest to take a deep breath and let Powell run things.”