Is the position of the Fed Chair in jeopardy? The dilemma of monetary policy under political and economic struggles

The conflict between Trump and Powell has a long history, and now it has escalated into a new round of attacks under the pretext of renovation disputes. This seemingly absurd political drama is pushing global market sentiment to a critical point.

What kind of pressure is Powell facing today? If he is really forced to step down, what kind of storm will it trigger?

Trump and Powell: Seven Years of Game

The core disagreement between Trump and Powell lies in the monetary policy direction: one advocates for interest rate cuts, while the other insists on maintaining the status quo. This contradiction has persisted since 2018.

Interestingly, Powell's initial appointment was due to Trump's nomination. In February 2018, Powell officially took office as the Fed Chairman. At that time, Trump hoped Powell would implement a loose monetary policy to support economic growth.

However, just a few months later, the conflict between the two became public. In October 2018, Trump publicly criticized Powell for the first time, calling the Fed's interest rate hikes "the biggest threat" and accusing Powell of being "crazy." Since then, Trump has continued to pressure Powell, and the war of words has escalated.

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

However, under U.S. law, the President does not have the authority to remove the Fed Chair due to policy disagreements unless "illegal or serious misconduct" evidence can be provided.

In July of this year, the Trump team suddenly put forward new accusations: demanding Congress to investigate Powell on the grounds of "political bias" and "making false statements in Congress," and accusing the Fed's headquarters renovation project of major violations.

Meanwhile, there are rumors that Powell is "considering resignation," causing the whole situation to escalate quickly. The power struggle of seven years seems to be reaching its climax.

Powell's Dilemma

Former Fed economist Robert Hetsel bluntly stated: "The Fed 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; on the other hand, the labor market has shown signs of cooling. This dual threat poses a significant challenge to Powell and the Fed's policymaking.

If the Fed cuts interest rates too early, it may lead to uncontrolled consumer inflation expectations; if it chooses to raise rates to stabilize inflation, it may trigger turmoil in the bond market, soaring interest rates, and even trigger a "financial panic."

In addition to the economic predicament, Powell also faces intense political battles. In the face of pressure from Trump, Powell chose to confront it. He requested the Inspector General to continue reviewing the headquarters renovation project and, unusually, spoke through official channels to provide a detailed response to the reasons for the cost increase, refuting the "luxurious renovation" allegations.

The dual pressure of the economy and politics has put Powell in the most difficult moment of his career.

The Potential Impact of Powell's Departure

If Powell is pressured to step down, the "pricing anchor" of the global financial markets may loosen.

The global head of foreign exchange strategy at a certain bank analyzed that if Powell is forcibly removed, the trade-weighted dollar index could plummet by 3%-4% within 24 hours, and there will be a sell-off of 30-40 basis points in the fixed income market. The dollar and bonds will carry a "persistent" risk premium, and investors may also be concerned about the politicization of the monetary swap agreements between the Fed and other central banks.

The analyst further pointed out: "What is more concerning is the current fragile external financing situation of the US economy, which could lead to more severe and disruptive price fluctuations than we predict."

A team of strategists from another financial institution has released a report stating that the "likelihood of Powell stepping down early is low," but if it were to happen, it would lead to a steepening of the U.S. Treasury yield curve, as investors would anticipate falling interest rates, accelerating inflation, and a weakening of Fed independence. They also noted that 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 return to a tightening stance. If the Fed begins to cut interest rates in September under conditions of economic stability and low unemployment, risk assets may benefit in the short term, and the crypto market will also be boosted. However, the current interest rate is still at 4.5%, and there is still a lot of policy space that needs to be released.

Powell's position is slightly shaken, and the market may experience violent fluctuations. This is not only a game of monetary policy but also an important contest concerning the independence of the Fed.