It goes without saying (or at least it should) that the market would probably collapse if Donald Trump did in fact move against Jerome Powell.
You’d think the prospect of further declines in equity markets would act as a check on Trump’s worst impulses with regard to the Fed. But then again, the same logic should have prevented Trump from ratcheting up the trade war ahead of the midterms, and it didn’t. Further, Trump surely knows the ongoing chaos at 1600 Penn. and now the government shutdown are contributing to market angst, but he pressed ahead with demands for border wall money anyway, abandoning a stopgap funding bill that had already passed the Senate. Here’s a look at S&P futs since the G20 “truce”:
Given the above, who can say whether the specter of an outright meltdown on Wall Street will keep him from firing Powell? It’s at least possible that Trump has resigned himself to the market crash after weeks spent “glued” to the financial news.
It’s not exactly surprising that Trump is furious with his Fed chair for hiking rates. What is somewhat surprising is that Trump was seemingly oblivious to the fact that incessantly berating the Fed actually reduced the chances of a pause in the hiking cycle by making the committee more inclined to “prove” their independence by plowing ahead with policy tightening.
It’s likely his advisors told him that piling pressure on Powell would only increase the odds of more hikes, but as ever, Trump’s pride got in the way and it looks like he actually believed he could dictate U.S. monetary policy. And see, this is the danger of appeasement. Why wouldn’t Trump think he could force a Fed pause simply by tweeting about it? After all, he’s dictating OPEC outcomes via his Twitter account, so why not Fed policy?
Whatever the case, Powell has publicly embarrassed Trump and an embarrassed Trump is right up there with a cornered animal on the “dangerous” scale.
It’s probably not a stretch to assume that Steve Mnuchin would resign if Powell were fired. Mnuchin took to Twitter on Saturday evening and this is what he said:
I have spoken with the President and he said “I totally disagree with Fed policy. I think the increasing of interest rates and the shrinking of the Fed portfolio is an absolute terrible thing to do at this time especially in light of my major trade negotiations which are ongoing, but I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.
Obviously, Trump didn’t say that. That’s Steve paraphrasing and if Trump did tell Mnuchin that he “never suggested firing Powell”, he’s lying to his Treasury Secretary, or at least according to Bloomberg’s four sources. Hilariously, it seems at least possible that Mnuchin was one of those sources.
Further, you’re reminded that Trump is furious with Mnuchin too and the proximate cause of that frustration is in fact Steve’s support for Jerome Powell. So you can understand why folks will be skeptical of anything Mnuchin has to say on this matter.
You should also bear in mind that Mnuchin has reportedly sought to gather opinions from bond dealers about what they would prefer in terms of policy tightening: rate hikes or balance sheet runoff. That’s another interesting undercurrent here.
For her part, Sarah Sanders told CNBC she isn’t “aware of plans to fire Powell”, while lawmakers are understandably nervous. At least two senators have already warned that firing Powell would be extremely ill-advised, with Senator Brown going so far as to call it “unlawful.”
Whatever the case, markets now have one more thing to be concerned about, and in light of that, we wanted to highlight a couple of charts for you. Equity volumes on Thursday and Friday were absolutely massive amid options expiries. Meanwhile, if you look at the daily low readings on the NYSE Uptick Minus Downtick index, it’s clear that bears are in the driver’s seat.
Meanwhile, the spread between down volume and up volume on the NYSE is sitting near the widest on record while the percentage of S&P companies trading above their 200-DMA is the lowest since 2011 (and falling – fast).
The takeaway here is that Trump is seemingly on the verge of making his biggest mistake yet – at least in terms of market sentiment. If he’s stupid enough to believe that removing Powell would somehow spark a rally based on the idea that the Fed would be (literally) forced to lean dovish, then he’s dumber than I thought – and that would be saying something.
A move against Powell would likely crash the dollar and equities as the world suddenly ponders the prospect of the Fed being explicitly (as opposed to implicitly) beholden to the White House and, more importantly, to a President who has now crossed the Rubicon into dictator territory.