What will Trump's "palace coup" against Powell bring about?

Author: Fairy, 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 a pretext to "pressure" him. This seemingly absurd political drama is pushing global market sentiment to a critical 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 lower interest rates, while the other stubbornly refuses to do so. With this core disagreement, the two have been at a standstill since 2018.

Interestingly, Powell's appointment actually came at the recommendation of Trump. In February 2018, Powell officially took office as the Chairman of the Federal Reserve, nominated by Trump. At that time, Trump expected Powell to implement a loose monetary policy to support economic growth.

In October 2018, Trump publicly criticized Powell for the first time, stating that the Federal Reserve's rapid interest rate hikes were the "biggest threat" and accusing Powell of being "crazy." The conflict between the two began to become public, and Trump continued to pressure Powell, resulting in an ongoing war of words.

In 2022, Powell was nominated by Biden for reappointment, extending his term until May 2026. As we enter the 2024 election year, the situation escalates further. Whether during the campaign or after winning, Trump has continuously criticized Powell for being "too slow to act and ineffective in lowering interest rates." 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 dismiss the chairman of the Federal Reserve due to policy disagreements unless there is evidence of "illegal activity or serious 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 "having a political bias" and "making false statements in Congress," accusing Powell of leading the Federal Reserve headquarters renovation project with significant violations suspected.

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

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

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

Currently, Powell is in the "purgatory" of monetary policy: on one hand, the tariff policy of Trump may bring upward pressure on prices, while on the other hand, signs of cooling in the labor market have already emerged. The dual threat poses challenges for Powell and the Federal Reserve's policymaking.

If the Federal Reserve lowers interest rates too early, it may lead to a loss of control over consumer inflation expectations; if it chooses to raise rates to stabilize inflation, it may cause turmoil in the bond market, soaring interest rates, or trigger "financial panic."

Outside of 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, in a rare move, spoke out through the Federal Reserve's official website, providing a detailed response to the reasons for the rising costs and rebutting the accusations of "luxurious renovations."

With the dual pressures of the economy and politics, Powell is facing a difficult moment in his career.

What will happen if Powell resigns?

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

The global head of foreign exchange strategy at Deutsche Bank, Saravelos, analyzed that if Trump forcibly replaces Powell, the trade-weighted dollar index could plummet by 3%-4% within the next 24 hours, and the fixed income market would 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 worrying is the current fragile external financing situation of the U.S. economy, which may lead to price fluctuations that are more severe and destructive than we have predicted."

In addition, the strategist team at ING, led by Padhraic Garvey, 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 expect interest rates to decline, inflation to accelerate, and a weakening of the Federal Reserve's independence. They also noted 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. His analysis points out that even if Trump successfully replaces Powell, it does not necessarily mean he can control the Federal Reserve with an iron fist. Once inflation really rises again, the new chairman will ultimately have to obediently return to a tightening policy. If the Federal Reserve starts cutting interest rates in September while the economy is still stable and unemployment is low, risk assets may see a short-term boost, and the crypto market will benefit as well. However, the current interest rate is 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 struggle for power and independence.