Back from the Brink

Trump decides not to fire Powell after all...

President Trump continued his criticism of the Federal Reserve chairman, Jerome Powell, earlier in the week. He called Powell a “major loser” and claimed that the central bank should make “pre-emptive cuts” to interest rates. However, just yesterday, Trump seemed to do an about-turn and made it clear that he had no intention of firing Powell or undermining the independence of The Fed. What changed?

Is Powell Toast?

I asked Mark Astley, former CEO of the $multi-billion currency management firm, Millennium Global, what he thought of the President’s sudden change of position. Here’s his response.

“The independence of the Fed is a core tenet of US financial architecture and notwithstanding a litany of policy mistakes over the years, that architecture is respected by both bond and stock markets.

“If the President undermined it (like Erdogan in Turkey) it would have negative consequences for US markets. Bonds would decline as it would raise the probability of rate cuts to serve the interests of growth and ignore inflation risks, stocks would decline as the discount rate applied to future earnings would rise and uncertainty associated with rising inflation expectations would slowly rise - and the dollar would decline as the profile of future rates would be lower than in the established architecture.

“Separately, a legal challenge to Trump's power to fire Powell would probably succeed as there is no mechanism in law (to my understanding) that the President can replace a sitting Fed Chairman - he only has the power to appoint.

“Hence, Trump's rhetoric is foolish as if he proceeds he will shoot himself in the foot; the markets have made him look foolish; and he could look very weak if the law pushes back against such a decision.

“Trump does not understand markets and it shows and I presume that some adults in the room (Treasury Secretary Scott Bessent?) have pulled him back from the brink.”

What are your thoughts? Comments open.