Whatever hope investors mustered over the weekend that Treasury Secretary Scott Bessent had made progress in the White House‘s trade negotiations with Japan quickly dissipated as traders tuned into the president’s latest tirade on Truth Social.
“‘Preemptive Cuts’ in Interest Rates are being called for by many,” President Donald Trump wrote just minutes after Monday’s opening bell. “With [prices] trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW. Europe has already ‘lowered’ seven times. Powell has always been ‘To Late,’ except when it came to the Election period when he lowered in order to help Sleepy Joe Biden, later Kamala, get elected. How did that work out?”
Trump’s escalation of his criticism of the Federal Reserve Chairman Jerome Powell comes just days after the president teased the possibility of firing him. While Trump threatening Powell is nothing new — recall that Trump did so relentlessly throughout his first term despite the historic strength of the economy — Kevin Hassett’s refusal to rule out the possibility marks a sea change in the broader White House’s messaging. Hassett, who had previously calmed markets by pledging that the administration would respect the central bank’s independence when he was the chairman of the Council of Economic Advisers, is now using his post as the director of the National Economic Council to deflect, saying the administration “continues to study” its options.
The Dow Jones Industrial Average, S&P 500, and Nasdaq are all down more than 3% for the day, with gold prices blowing past a record $3,431.80 per ounce and the U.S. dollar down to a three-year low.
There’s the open question of whether Trump has the constitutional authority to fire Powell, a legal skirmish his team seems to crave. But the broader question for practical purposes is whether purporting to fire Powell will actually confer any short-term advantage to Trump or whether it would imperil his entire presidency. The markets would indicate the likelihood of the latter.
Powell’s term expires in just 13 months. But let’s consider the possibility that Trump actually does pull the trigger on Powell’s chairmanship. While the courts duked out the details, the Fed’s vice chairman would become the acting chairman, making Biden appointee Philip Jefferson the effective head of the Fed. Federal Open Market Committee meetings would likely proceed as scheduled, but with only 11 of the ordinary 12 voting members allowed to cast votes.
The president’s legal power to fire members of the Fed may be open to interpretation, but the scope of his ability to staff the body is not. Any pick he proposed would not be allowed to join the Board of Governors without the Senate’s consent, full stop.
While Trump has attempted to paint Powell as a hawk, he’s firmly in the ideological center of the FOMC, and without him, the Fed might be inclined to vote in even more unanimity than it already does. Consider that in the last 10 years, only 30 dissents were cast out of 849 total votes. Only eight dissenting votes have been cast in this decade.
But the markets would matter more than the mechanics of attempting to rig the Fed.
It’s not unusual for the stock market to go down, Treasury yields to go up, and the U.S. dollar to decline. What’s anomalous and anxiety-inducing is for all three things to happen at the same time, much less for them to happen while the unemployment rate hovers close to half-century lows, inflation trends closer to its 2% benchmark, and economic growth at the end of 2024 remained relatively robust.
The bond market is widely perceived as the world’s safe haven for investments, so when stock markets go down, Treasury yields, which move inversely from the value of the bonds sold, unlike stocks, usually go down in tandem. The U.S. dollar usually moves opposite inflation, meaning it surges when inflation moderates or even when investors gain clear confidence that the government, whether it’s the Fed or the president, is cracking down on an inflationary wave.
But investors scared off by the stock market’s volatility haven’t been stowing away that cash in Treasurys or even money market accounts. Rather, all those greenbacks are evidently being exchanged for Japanese yen and Singapore dollars.
In other words, as Trump publicly professes to onshore U.S. goods and services, wealth has begun a mass exodus.
Some of this is the inevitable consequence of the White House’s explicit preferences. When CEA Chairman Steve Miran lamented the “burden” of the U.S. dollar’s status as the world’s reserve currency, investors heard him loud and clear, offloading their dollars accordingly.
But Monday’s mayhem provides a specific preview of what would be to come if Trump does the unprecedented and fires Powell. While other presidents have indeed manufactured longer-term inflation crises by packing the Fed with partisans as President Richard Nixon did to disastrous consequence, none have tried to outright fire the Fed chairman. If Trump actually followed through on his threat, declaring the century of the central bank’s independence over and monetary policy once more an instrument of political advantage, the ensuing disintegration of equities, bonds, and the greenback would constitute a domestic depression as investors came to the logical conclusion that they would retain no reason to trust the stability of the U.S. dollar in the crosshair of political pressures.
The cost would not be limited to the nearly two-thirds of people with money in the stock market. On top of acting as a de facto tax on workers who receive their wages in U.S. dollars, a weakening dollar would also necessitate that importers have to pass on the cost of tariffs to consumers. And while Trump could hypothetically pressure the 11 remaining members of the Fed to slash the federal funds rate, this overnight lending rate has dramatically diverged from bond yields in recent years, meaning Treasury yields could continue to climb back to 20-year highs. Even a one-point jump in Treasury yields could add hundreds of billions of dollars to the cost of just financing the $9.35 trillion of our national debt that’s maturing in the next 12 months.
STOCK MARKET AND DOLLAR SLIDE AS TRUMP SLAMS POWELL AGAIN
All of these financial reasons and none of the ethical ones are the real rationales for why Trump likely won’t go through with firing Powell. In issuing his 90-day pause of the so-called reciprocal tariffs imposed beyond his 10% minimum, Trump already demonstrated that he has a healthy respect for the realities of the bond market. Gutting the greenback’s preeminent status as the world’s reserve currency would run directly against the notion of putting America First.
And if he refused to regard reality and fired Powell anyway, the market fallout would bring his second term as president to an effective end before it really began. Tax cuts, trade deals, a manufacturing renaissance — all would be as dead as the GOP midterm dreams.