Powell on the Firing Line: Investors Eye Fed Independence
What happened?
President Trump has escalated his public criticism of Fed Chair Jay Powell. He asked lawmakers if he should fire Powell and criticized the $2.5 billion renovation of the Federal Reserve building. These headlines caused the dollar to fluctuate by 1.2% during the day and pushed equities down, though they rebounded late on July 16. JPMorgan CEO Jamie Dimon warned that "playing around with the Fed" could backfire on the markets. Meanwhile, the dollar is off to its worst start since the gold-standard era, and 10-year yields are at 20-year highs.
Source: T.J. Kirkpatrick/Bloomberg
Why does this matter?
Fed credibility risk: Political meddling would increase break-even inflation and term premia, which are already the highest in a decade. Besides, sustained interference could push investors toward the euro, yen and Swiss franc.
Steeper curve, dearer credit: While cheaper short-term money may be attainable, long-term capital would be costlier if a compliant chair slashes rates.
Tariff feedback loop: A weaker Fed plus Trump's widening tariff war could lead to inflation of over 3% for years.
What's the counterpoint?
Trump called a Powell ouster "highly unlikely," and previous threats have only produced shallow pullbacks. The S&P 500 is still near record highs. Furthermore, legal challenges to his removal would delay the process. Nevertheless, some investors believe that lower policy rates could offset the initial damage to credibility.
finformant view
A direct challenge to Powell could cause the dollar to depreciate rapidly, forcing foreign central banks to rethink their reserve allocations. For now, the bond market is a stronger line of defense than Congress. If yields rise again, the political appetite for a Fed feud will quickly diminish.