After this week, Wall Street’s obliged to seriously consider the possibility that Jerome Powell might resign or be removed as Fed Chair before his term ends next May.
To be clear, there’s no “cause” for removing Powell. And firing him without cause is illegal. Further, the Trump administration’s efforts to compel Powell’s resignation are unconscionable and dangerous.
But a lot of what Donald Trump’s done since returning to office in January is illegal, unconscionable and dangerous. No one’s stopped him yet. And the Supreme Court’s plainly on board with letting Trump do more or less whatever he wants.
As discussed here at some length on Thursday, Russ Vought’s letter accusing Powell of misleading Congress about cost overruns tied to renovations at the Marriner Eccles building was a de facto formalization of what, until this week, was just another informal smear campaign. The OMB’s giving congressional Republicans an excuse to investigate Powell, and they may well take it.
So… what? Well, nine months is a long time for Powell to last in the role given how much pressure Trump’s applying. I think we’re looking at even odds that America may soon find itself in a scenario where the central bank becomes openly beholden to an authoritarian executive. However much it might pain Trump-loving Wall Street strategists to concede the peril inherent in such an outcome, it’s either broach the subject or pretend nothing’s afoot. I’m not sure how the latter’s an option.
On Friday, ING went ahead and asked the uncomfortable question: “What if Powell leaves?” The bank’s not a top-tier Wall Street firm, and it’s very unlikely that anything they say will make its way to Scott Bessent’s ears, let alone Trump’s, so they needn’t worry about getting any irritable calls from The White House. And they’re anyway Dutch, so Trump has no jurisdiction.
After describing Powell’s hypothetical ouster or exit as “low-probability,” ING said that in the event of “an early departure,” Powell would likely be replaced “quickly by a replacement super-dove.” That’s as unnerving as it is obvious. I’ve said this repeatedly, but to reiterate: Handing the keys of monetary policy to a super-dove who serves solely at the pleasure of an autocratic populist executive is the most dangerous possible outcome for domestic monetary policy.
ING suggested that the Committee would continue to function on a majority decision basis, and therefore wouldn’t “cut rates just because Trump commands it,” but I don’t buy that. At all. If Congress lets Trump remove or demote Powell, they’d surely let him do the same for other Fed officials. And the notion that Trump would go through the trouble of making Powell an example only to secure one extra dovish vote upon his removal seems laughable. If you’re not going to get your rate cuts, why bother?
Anyway you cut it (pun fully intended), the curve’s likely to steepen, first from front-end yields re-pricing sharply lower to reflect much higher odds of a much lower policy rate much quicker, and then from the back-end selling off (i.e., longer-end yields rising) to reflect the constellation of concerns associated with a loss of monetary policy independence.
“[T]he long-end of the bond market is a deeper thinker than the front-end,” ING wrote. “It will be questioning the risks being added to inflation [and] the long-end already has an elevated fiscal deficit and upside to consumer price pressures coming from tariffs to worry about,” the bank went on. “Adding front-end rates that are arguably too low for the economy risks adding permanence to the higher inflation prints.”
As for the dollar… well, suffice to say, as ING did, that the greenback’s “value as a reserve currency fundamentally lies in Fed independence.” If you remove that independence, you’re asking for trouble.
“Powell’s removal or resignation is likely to trigger a new round of severe downward volatility in the dollar, and the damage would be there to stay,” ING warned, describing a “highly toxic mix” and noting that “the initial reaction would likely be strictly tied to the size of the long-dated Treasurys selloff [but] the dollar would face the additional negative impact from a sharp dovish repricing in Fed rate expectations.”
I realize some of this probably sounds like Chicken Little. Or the boy who cried wolf. Put as two rhetorical questions: How many times since 2016 have very smart people warned that Trump’s worst impulses risk an existential financial catastrophe, and how many times has the financial world actually ended, not counting March of 2020?
I take that point. Really I do. But remember: In the boy who cried wolf parable, the wolf eventually showed up.
Here’s a decent article about what P2025 is after and how Vought is central to establishing an autocratic theocracy. These people interpret the Constitution in similar ways that the Bible tells them gays must be re-educated from sin and marginalized by law, women should not have rights because of the apple. And the Presidency should overrule the courts and Congress. And the Universe is 6000 years old, science is the enemy of Faith, secularism should be torn out by trunk and root, and so on. https://www.wbur.org/onpoint/2025/02/12/russell-vought-radical-constitutionalism-trump-constitutional-crisis
Heading US back so Christian white, and might, makes right again
A former student of mine ran all of ING’s US fixed income money for many years. It may not be a huge player but it plays for my teamthey are my player and is not insignificant. My very smart alum now runs all the government money in one of the western states. (He moved for the outdoor sports.)
I think the market (especially in hard currency) is already starting to reflect your viewpoint that this outcome is not only possible, but likely. See it more as resignation than firing though as can’t imagine Trump firing all the hawks on the Fed Board works, especially if inflation flares up.
Since FOMC is a committee and Senate must approve nominees, Trump would want to replace Powell and a few/several governors during 2026 i.e. before any risk of losing Senate control. Extra-judicial firing of Fed Chair and multiple governors in a short period would be another Saturday Night Massacre but 10X, very dramatic, and I think market reaction would be very severe.
How much of this is Trump trying to dominate Powell vs. Trump trying to control the Central Bank? It seems more of a personal vendetta than a policy thing.
This is the sycophant and scapegoat administration. You are one or the other. Just for the theater I hope Jay stays and does nothing if the data continues to show up mixed. Just someone to tell Princess Emolument (Molly) “no” would be worth it (especially if the “it” is 25 basis points and not being stubborn in the face of a full blown recession).
Powell may just be the last adult in Washington D.C. in a position of any consequence. Hopefully the Congress will prove unable, or perhaps unwilling, to do much with the Marriner Eccles story. That or Trump TACOs again as the bond vigilantes re-emerge to drive-up long-term rates.
H-Man, the Fed fiasco may have legs since a Fed reserve seat comes up every two years only during even years and the appointment is for 14 years. Next opening is January. So if Powell is ousted, and then POTUS makes the January appointment, he still needs to find two more votes for a majority on the Federal Reserve but then the FOMC has 12 members of which the Federal Reserve is 7. So now he has to find another 3 votes in order to have a majority of 7 votes. Those people are appointed for 1 year terms. Which suggests it is doable but probably needs to be done by January when that Federal Reserve seat comes open. Scary times indeed.
There is an event iin the past that perfectly describes what would happen if Powell was replaced. Back in 1976 Jimmy Carter became President and he strongly disliked Arthur Burns. He bad-mouthed him all the time and within a year Carter forced Burns out and replaced him with a ‘yes-man’, G.William Miller. Miller never hiked Fed Funds – ever – rates went up, inflation went up, the economy went nowhere, and gold went to $800. You can look it up.
Powell is best advised to don his worst fitting suit and mix it up with the barking bully on his own terms. Time to give MAGA a taste of STFU with a surprise 25 bp hike later this month. The independence of the Fed and the proper functioning of the markets is more important than Powell’s job (or legacy), or his ostensible boss’ drive to put a toll booth in front of everything.