Via Bloomie over the weekend:
President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate hike and months of stock-market losses, according to four people familiar with the matter.
Advisers close to Trump aren’t convinced he would move against Powell and are hoping that the president’s latest bout of anger will dissipate over the holidays, the people said on condition of anonymity. Some of Trump’s advisers have warned him that firing Powell would be a disastrous move.
Yet the president has talked privately about firing Powell many times in the past few days, said two of the people.
…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.
It would not come entirely as a shock given the number of senior folks already boned. Nonetheless, we can expect the first round of reactions to include stocks crashing and bonds soaring even in the US. One can only assume that if it did happen then a ready made replacement would be parachuted in so the shock would be brief as market fear turned quickly to greed at a dovish new chair. The bond curve would then steepen.
The forex response might initially be a stronger US dollar as risk retreated violently but if the market turned swiftly to embrace a newly dovish monetary regime then the US dollar is likely to fall away pretty fast.
Longer term, the US could potentially face sovereign downgrades bringing the twin deficits to bear on the currency. Not to mention an endless uber-scandal engulfing Washington with all kinds of unpredictability including constitutional crisis and impeachment. It would be a blow to the US dollar safe haven status over the long run.
Thus, one likely immediate winner regardless of the direction of the US dollar will be gold as the fiat system shudders. Indeed, such an event would structurally entrench gold as essential portfolio insurance and lift it permanently.
Overall, such an event is likely to put upwards pressure on the Australian dollar over time.
As we wake this morning, the White House is rapidly walking back the comments. Steven Mnuchin tweeted on the weekend:
(1/2) I have spoken with the President @realDonaldTrump and he said “I totally disagree with Fed policy. I think the increasing of interest rates and the shrinking of the Fed portfolio is an absolute terrible thing to do at this time,…
— Steven Mnuchin (@stevenmnuchin1) December 22, 2018
(2/2) especially in light of my major trade negotiations which are ongoing, but I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.”
— Steven Mnuchin (@stevenmnuchin1) December 22, 2018
And Trump new chief of staff added overnight:
NEW: Incoming acting White House chief of staff Mick Mulvaney tells @jonkarl that President Trump “now realizes” that he “does not have the ability” to fire Federal Reserve chairman Jerome Powell https://t.co/ulqc1cycAX #ThisWeek pic.twitter.com/JEqQ26cYra
— ABC News Politics (@ABCPolitics) December 23, 2018