Markets rattled by ‘credible threat’ of Trump trying to fire Fed chief Powell

NEW YORK – Once again, US President Donald Trump demonstrated his power to shake up global financial markets. This time, by returning to one of his favourite topics: whether to fire Federal Reserve chair Jerome Powell.

In an echo of the havoc that Mr Trump unleashed

with his trade war in early April,

markets were briefly turned upside-down on July 16 after a White House official said the President was likely to soon remove Mr Powell.

Stocks, the US dollar and long-term US government bonds quickly retreated, while short-term Treasuries rallied on speculation that whoever Mr Trump appoints to replace Mr Powell will bend to the President’s will and cut interest rates.

Yet in less than an hour, the moves unwound after the President downplayed the possibility, saying he was “not planning” to fire Mr Powell, someone he has been lobbing almost daily criticisms at for moving too slowly.

By most measures, the markets’ reaction was relatively muted, in no small part because of Mr Trump’s penchant for bluffing – not to mention questions about whether a US president has the legal authority to actually remove a Fed chair whose interest rate policy he dislikes. 

But the message that markets sent was not so muted. To many, the initial moves reflected a deep-seated uneasiness that Mr Trump will do what had long been unthinkable: That by firing Mr Powell, he will end the Fed’s decades-long independence in setting monetary policy, and in the process risk stoking a surge in inflation.

“The markets are taking this as a credible threat,” said Mr Joe Gilbert, portfolio manager at Integrity Asset Management. “This is unsettling, and it remains to be seen if this is just a trial balloon by Trump to gauge market sentiment if indeed he follows through with firing Powell. Ultimately, we believe the legal hurdles will be too substantial to remove Powell.”

To some observers, like Wells Fargo macro strategist Erik Nelson, the reaction in major asset classes may convince the administration that firing Mr Powell will not prove to be a panacea for the economy and markets. 

The yields on two-year Treasuries, one of the securities most sensitive to the Fed’s benchmark policy rate, declined as much as eight basis points, while the rate on the 10-year note reversed a drop of five basis points. The Bloomberg Dollar Spot Index erased a gain of 0.2 per cent to drop as much as 0.7 per cent. The S&P 500, which was up as much as 0.3 per cent early in the session, dipped as much as 0.7 per cent.

Many of those knee-jerk moves quickly reversed after Mr Trump made it clear that Mr Powell’s firing was not imminent.  

Still, many have expressed concern that even broaching the subject was potentially disruptive to the stability of US markets that have long relied on a central bank that is free from political influence.

JPMorgan Chase chief executive Jamie Dimon said on the bank’s earnings conference call on July 15 that the Fed’s continued independence is “absolutely critical” and meddling with the central bank “can often have adverse consequences”.  

While Mr Trump told reporters in the Oval Office that “no, we’re not planning on doing anything”, his comments left open the possibility of an attempt to oust Mr Powell for cause. While Mr Trump and his allies have lambasted Mr Powell for most of the year over the central bank’s decision to hold interest rates steady, they have lately seized on the swelling cost of renovations to the central bank’s Washington headquarters.

Asked on July 15 if the renovation price tag amounts to an offence that can lead to firing, Mr Trump said: “I think it sort of is.”

Charles Schwab chief fixed income strategist Kathy Jones said: “Just threatening to fire him is a bad precedent. It sends the message that ‘hey, I’m willing to break all precedent and cross that line to get what I want’.”

Mr George Saravelos, Deutsche Bank’s global head of foreign exchange strategy, said in a report over the weekend that if Mr Trump were to force Mr Powell out, the subsequent 24 hours would probably see a drop of at least 3 per cent to 4 per cent in the trade-weighted US dollar, as well as a 30- to 40-basis point fixed-income sell-off.

For now, at least, the markets appeared to take Mr Trump at his word that he was not about to replace Mr Powell before his term is up next year. Yet, investors were left gaming out the various scenarios that may unfold if he did. 

“What does it mean for markets? Lower market confidence, more rate cuts priced, weaker US dollar and higher term premium,” Mr Jordan Rochester, head of macro strategy for Europe, the Middle East and Africa at Mizuho International, wrote in a note.

“Trump’s denial has stopped the pace of the move, but folks now need to consider the possibility in the months ahead.”

Mr Thierry Wizman, global foreign exchange and rates strategist at Macquarie Group, said that “from a more structural long-term perspective, it also means the Fed may pay less attention to inflation”. BLOOMBERG