Jerome Powell’s possible early departure from the chairmanship of the Federal Reserve (Fed) is leaving investors facing great uncertainty. President Donald Trump has criticized Powell for not lowering US interest rates fast enough and has repeatedly raised the possibility of removing him before his term ends. However, Trump has also stated that removing Powell is “unlikely”.
Last Thursday, Trump stated that he had a positive meeting with Powell during a visit to the Federal Reserve Headquarters in Washington regarding a renovation project worth approximately $2.5 billion, and said that removing Powell was not necessary.
However, investors are carefully examining how the market would react if Powell were dismissed or resigned.Various Scenarios and Market Reactions
Investors are considering various scenarios, such as Powell’s dismissal, resignation, or the appointment of a new candidate early. However, predicting market reactions for each of these scenarios seems quite difficult. Last week, news that Trump was considering dismissing Powell led to a 0.7% drop in the S&P 500 and a 0.9% depreciation of the dollar. This situation provided some clues about possible market reactions.
Cresset Capital’s chief investment officer, Jack Ablin, stated, “Financial markets sent clear warnings about the consequences of political interference,” highlighting investors’ concerns about any political interference targeting Powell.
The Biggest Risk: Powell’s Removal
The biggest risk for the markets could arise if Trump removes Powell from office.
This is seen as a serious attack on the Fed’s independence, and markets are seriously concerned about this independence. According to Deutsche Bank strategists, such a move could lead to a 6% depreciation of the dollar, which would likely be a historic drop. Furthermore, a rise of approximately 20 basis points in 10-year Treasury yields and as much as 45 basis points in 30-year Treasury yields is expected.Investors initially expect stock markets to gain value following Powell’s removal, as a new Fed chairman might be more inclined to cut interest rates, but initial reactions will likely be sell-offs.
Cresset Capital’s Ablin stated that the decline in stocks could be greater than the 1% seen last week.Loss of Fed Independence and Inflation Risks
If Powell is removed, Trump’s efforts to further politicize the Fed could increase inflation uncertainty. This could result in investors demanding higher yields and lead to a yield curve. Nomura’s chief economist for advanced markets, David Seif, said, “The Fed’s loss of independence greatly increases inflation uncertainty, forcing investors to demand more compensation in long-term investments.”
Gold may be the only asset that could appreciate in value under these conditions.
FP Markets chief analyst Aaron Hill stated that the price of gold could reach record highs near this year’s $3,400 levels.Powell’s Resignation: Period of Uncertainty
If Powell resigns, the period of uncertainty may be shorter than if he were removed from office, even though concerns about the Fed’s independence would persist. Powell has repeatedly stated that he would not leave his post even if Trump demanded his resignation.
However, this situation could reinforce concerns about the Fed deviating from its two main mandates (full employment and price stability).Macro Hive research firm researcher Benjamin Ford said, “Trump’s attempt to impose his views by pressuring the Fed chairman could turn this into a threat to the members of the Fed.” This could also damage the perception of the Fed’s independence.
Shadow Chair Scenario and the State of the Dollar
The least risky scenario might be that Trump simply appoints a new Fed chairman and allows Powell to complete his term until May. However, the new chairman’s statements on interest rate cuts could cause the dollar to depreciate.
Nationwide’s chief strategist, Mark Hackett, said, “While it’s reasonable to assume the new chairman will take a more dovish stance, that assumption already exists in the markets.”
In conclusion, any political pressure on the Fed’s independence could create permanent damage in the markets and lead to a depreciation of the dollar. This process could fundamentally alter the global financial landscape.
