“The threat alone is highly unlikely to impact markets, which have become de-sensitized to all the noise and tweets from the White House,” said Kristina Hooper, chief global market strategist for Invesco. “After all, he’s been complaining about him for months now. But I believe we’d see a strong negative reaction in markets if the president did in fact fire Powell since that sends a message that the Fed is no longer independent or apolitical.”
Firing Powell
Trump has discussed firing Powell as his frustration rose following this week’s rate hike and months of stock tumult, according to four people familiar with the matter. Advisers close to the president aren’t convinced he would move against Powell and are hoping his anger dissipates over the holidays, the people said on condition of anonymity.
On Saturday, White House Press Secretary Sarah Sanders said she doesn’t know of a plan to fire Powell. “I’m not aware of any plans to do this,” Sanders told Bloomberg.
Markets would “erupt” if he did, said Nick Sargen, chief economist with Fort Washington Investment Advisors. “It would be construed as a loss of the Fed’s independence, and the dollar would sell off along with stocks.”
While warning against unnerving markets, analysts also acknowledged that Powell is unlikely to win any popularity contests among traders right now. His program of pushing up borrowing costs even as inflation expectations ease is blamed for exacerbating and even causing the meltdown in equities.
“The market had its worst week in 10 years because of Powell,” said Jim Bianco, president of Bianco Research LLC in Chicago. Investors think he’s “making a giant policy mistake. So Powell’s approval rating on Wall Street is crashing like the Dow Jones,” Bianco said. “If the stock market continues lower next week, the Fed’s credibility will be in real trouble.”
Asked if Trump’s animosity will backfire and stiffen Powell’s resolve, Bianco said: “No, I do not think the Fed will turn more hawkish, not at all. Right now they are huddled and discussing why the stock market sold off.” He added: “They are worried about the market reaction to their FOMC meeting, not Trump.”
Fed angst was at the centre of last week’s market cyclone, in which the S&P 500 tumbled 7.1 per cent and the Nasdaq Composite Index became the biggest US equity gauge to enter a bear market since the financial crisis. The Federal Open Market Committee raised interest rates for the fourth time this year on Wednesday and Powell downplayed the role of market turbulence in setting policy, disappointing bulls who hoped for broader acknowledgement of their plight.
While oversold markets could easily ignore news of the discussions and bounce before Christmas, “if he tries to fire Mr. Powell, it will be very negative,” said Matt Maley, equity strategist at Miller Tabak & Co. “People would become more convinced that the president has become unhinged. His tweets and comments would finally be seen as going too far.”
It’s unclear how much legal authority the president has to fire Powell. The Federal Reserve Act says governors may be “removed for cause by the President.” Since the chairman is also a governor, that presumably extends to him or her, but the rules around firing the leader are legally ambiguous, as Peter Conti-Brown of the University of Pennsylvania notes in his book on Fed independence.
“Seems like the story is running like wildfire,” said John Spallanzani, portfolio manager at Miller Value Partners. “I have no idea if it’s true. I trust Treasury Secretary Mnuchin and others in the administration to dissuade the president from taking such action.”
Bloomberg
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