Fed Chair Caught in Political Maelstrom

The conflict between former U.S. President Trump and current Fed Chairman Powell has a long history, and now under the guise of renovation disputes, Trump is attempting to pressure Powell to resign. This seemingly absurd political drama is pushing global market sentiment to a critical point.

Powell is currently under immense pressure. If he is indeed forced to resign, it could trigger a series of chain reactions.

Trump and Powell: Seven Years of Grudges and Affections

The core of the conflict between Trump and Powell lies in interest rate policy. One advocates for rate cuts, while the other insists on maintaining rates. This divergence has persisted since 2018.

Interestingly, Powell was initially appointed by Trump. In February 2018, Powell officially took office as the Fed chairman. At that time, Trump hoped Powell would implement loose monetary policies to promote economic growth.

However, in October 2018, Trump publicly criticized Powell for the first time, stating that the Fed's interest rate hikes were the "greatest threat" and accused Powell of being "crazy." Since then, the conflict between the two has become public, and the war of words has escalated.

In 2022, Powell was reappointed, extending his term until May 2026. As the 2024 election year approaches, the situation further deteriorates. Trump has repeatedly criticized Powell during the campaign for "acting slowly and not cutting rates effectively," and has called for his resignation multiple times.

However, under U.S. law, the president does not have the authority to remove the Fed chair due to policy disagreements unless there is clear evidence of "wrongdoing or serious neglect."

In July of this year, the situation took a turn. The Trump team suddenly accused Powell of serious violations in the renovation project of the Federal Reserve headquarters, calling for Congress to conduct an investigation. At the same time, rumors emerged that Powell was "considering resigning," quickly escalating the situation.

Powell's Dilemma

Currently, Powell is in a dilemma regarding monetary policy: on one hand, Trump's tariff policy may drive up prices; on the other hand, the labor market has shown signs of cooling. This dual pressure poses a significant challenge for the Fed in policy formulation.

If the Fed lowers interest rates too early, it may lead to uncontrolled inflation expectations; if it chooses to raise rates to control inflation, it could trigger turmoil in the bond market, soaring interest rates, and even trigger a financial crisis.

Under pressure from Trump, Powell chose to fight back. He called for a continued review of the headquarters renovation project and provided a detailed explanation of the reasons for the rising costs through official channels, refuting the accusations of "luxurious decoration."

The dual pressure of the economy and politics has made Powell experience the toughest moment of his career.

The Potential Impact of Powell's Departure

If Powell really steps down, the "pricing anchor" of the global financial markets may be shaken.

Some analysts predict that if Powell is forcibly replaced, the dollar index could plummet by 3%-4% within 24 hours, and the fixed income market could see a sell-off of 30-40 basis points. The dollar and bonds may face ongoing risk premiums, and investors may also worry about the politicization of the Fed's currency swap agreements with other central banks.

What is more concerning is the current fragile external financing situation of the U.S. economy, which may lead to more severe and destructive price fluctuations.

Some analysts believe that the "likelihood of Powell resigning early is relatively low," but if it were to happen, it could lead to a steepening of the U.S. Treasury yield curve, as investors would anticipate lower interest rates, accelerating inflation, and a weakening of Fed independence. This would create a "deadly combination" for the depreciation of the dollar.

From the perspective of risk assets, even if Trump successfully replaces the Fed chairman, he may not be able to fully control monetary policy. If inflation rises again, the new chairman may ultimately have to adopt tightening policies. If the Fed starts cutting interest rates in September while the economy is stable and unemployment is low, risk assets may benefit in the short term, and the crypto market could also get a boost. However, current interest rates remain at a relatively high level of 4.5%, leaving considerable room for future rate cuts.

Powell's position is slightly shaken, which could trigger market turbulence. This is not only a game of monetary policy but also an important contest regarding the independence of the Fed.