Powell's countdown for staying or leaving: A global financial storm triggered by a "renovation"?

Original author: Fairy, ChainCatcher

Original text edited by: TB, ChainCatcher

"Can "renovation" also remove the Chairman of the Federal Reserve?"

Trump started "attacking" Powell during the election period, and now he is using the renovation controversy as an excuse to stage a "coup." This seemingly absurd political drama is pushing global market sentiment to a tipping point.

What kind of pressure is Powell under now? If he is really forced to resign, what kind of storm will it trigger?

Trump and Powell: A Seven-Year Love-Hate Relationship

The contradiction between Trump and Powell ultimately boils down to one sentence: one wants to cut interest rates, while the other stubbornly refuses to do so. This core disagreement has led to a standoff between the two since 2018.

Interestingly, Powell's appointment actually came at the behest of Trump. In February 2018, Powell officially took office as the Chairman of the Federal Reserve, nominated by Trump. At that time, Trump hoped Powell would implement an accommodative monetary policy to support economic growth.

In October 2018, Trump publicly criticized Powell for the first time, calling the Federal Reserve's rate hikes "the greatest threat" and accusing Powell of being "crazy." The conflict between the two began to become public, and Trump continued to pressure Powell, leading to an ongoing war of words.

In 2022, Powell was nominated by Biden for reappointment, extending his term until May 2026. As the 2024 election year approached, the situation escalated further. Whether during the campaign or after winning, Trump continuously criticized Powell for being "too slow in action and insufficient in interest rate cuts." Over the past few months, Trump has repeatedly called for Powell's resignation.

However, it is not easy for Trump to replace Powell. According to U.S. law, the president does not have the authority to remove the Federal Reserve Chairman due to policy disagreements unless he can provide evidence of "illegal or gross misconduct."

In July of this year, a real breakthrough emerged. The Trump team suddenly threw out a "new script": Trump requested Congress to investigate Powell on the grounds of "existing political bias" and "making false statements in Congress," accusing Powell of leading the Federal Reserve headquarters renovation project, which is suspected of significant violations.

During this period, rumors circulated that Powell was "considering resignation," causing the whole matter to rapidly escalate. Seven years of power struggle have reached a climax.

Policy Dilemma: Powell's "Monetary Hell"

Former Federal Reserve economist Robert Hockett bluntly stated: "The Federal Reserve has been cornered."

Currently, Powell is in the "purgatory" of monetary policy: on one hand, Trump's tariff policy may bring upward pressure on prices, while on the other hand, the labor market has shown signs of cooling. The dual threats pose challenges for Powell and the Federal Reserve's policy-making.

If the Federal Reserve cuts interest rates too early, it may lead to uncontrolled consumer inflation expectations; if it chooses to raise interest rates to stabilize inflation, it may cause turmoil in the bond market, skyrocketing interest rates, or trigger a "financial panic."

Outside the economic predicament, it also faces intense political battles. However, in response to Trump's pressure, Powell chose to fight back. He requested the Inspector General to continue reviewing the headquarters renovation project and unusually spoke out through the Federal Reserve's official website, providing a detailed explanation for the rising costs and rebutting the accusations of "luxurious renovations."

Economic and political pressures are putting Powell in a difficult moment of his career.

What will happen if Powell leaves?

If Powell cannot withstand the pressure and steps down, the "pricing anchor" of the entire global financial market may loosen.

According to Saravelos, the global head of foreign exchange strategy at Deutsche Bank, if Trump forcibly replaces Powell, the trade-weighted dollar index could plummet by 3%-4% within the following 24 hours, and the fixed income market may see a sell-off of 30-40 basis points. The dollar and bonds will carry a "persistent" risk premium, and investors may also worry about the politicization of the Federal Reserve's currency swap agreements with other central banks.

Saravelos further pointed out: "What is even more concerning is the current fragile external financing situation of the U.S. economy, which could lead to more severe and destructive price fluctuations than we predicted."

In addition, the strategist team of ING, including Padhraic Garvey, released a report stating that the "likelihood of Powell stepping down early is low," but if it occurs, it would lead to a steepening of the U.S. Treasury yield curve, as investors would anticipate lower interest rates, accelerating inflation, and a weakening of the Federal Reserve's independence. They also pointed out that this would create a "deadly combination" for the depreciation of the dollar.

The analysis by crypto KOL Phyrex takes a more risk asset perspective. He analyzes that even if Trump successfully replaces Powell, it doesn't necessarily mean he can "control the Federal Reserve with one hand." Once inflation rises again, the new chairman will ultimately have to obediently return to a tightening path. If the Federal Reserve begins to cut interest rates in September, under the premise of a stable economy and low unemployment rate, risk assets may receive a boost in the short term, and the crypto market will also benefit. However, current interest rates are still at 4.5%, and there is still "a lot" of liquidity to be released.

Powell's position sways slightly, and the market trembles. This is not only a game of monetary policy but also a contest of power and independence.