The Turmoil Over the Fed Chair Position

Since 2018, the differences between Trump and Fed Chairman Powell have persisted. This years-long game has now evolved into a captivating political struggle that affects the nerves of global markets.

Powell is currently facing unprecedented pressure. If he is indeed forced to resign, it could trigger a financial storm.

The core of the contradiction between Trump and Powell lies in the orientation of monetary policy: one side wants to cut interest rates to stimulate the economy, while the other insists on maintaining high interest rates to curb inflation. This divergence has continued and escalated since 2018.

Interestingly, Powell was initially nominated as the Fed Chair by Trump. Powell officially took office in February 2018, when Trump hoped he would implement loose monetary policies to support economic growth. However, just a few months later, their relationship began to deteriorate.

In October 2018, Trump publicly criticized Powell for the first time, calling the Fed's rapid interest rate hikes the "greatest threat" and accusing Powell of "going crazy." Since then, the war of words between the two has not stopped.

Although Powell was reappointed in 2022, extending his term until May 2026, the situation escalated further with the arrival of the 2024 election year. Trump has repeatedly called for Powell to resign, accusing him of "acting too slowly and not cutting rates effectively."

However, under U.S. law, the President does not have the authority to remove the chair of the Fed due to policy differences unless there is proof of "illegal or gross misconduct."

In July of this year, the situation took a new turn. The Trump team suddenly made new accusations: calling for Congress to investigate Powell, claiming that there were significant violations suspected in the renovation project of the Federal Reserve headquarters building. This move quickly escalated the entire incident, with rumors even suggesting that Powell was "considering resignation."

Currently, Powell is facing a dilemma in monetary policy: on one hand, Trump's tariff policy may bring upward pressure on prices; on the other hand, the labor market has shown signs of cooling. This complex situation poses a significant challenge for the Fed's policy-making.

If the Fed cuts interest rates too early, it could lead to an uncontrollable inflation expectation; if it chooses to raise interest rates to stabilize inflation, it may trigger turmoil in the bond market and even cause a "financial panic."

Faced with pressure from Trump, Powell chose to respond directly. He requested to continue reviewing the headquarters renovation project and detailed the reasons for the cost increases through official channels, refuting the accusations of "luxurious renovations."

If Powell really resigns, the global financial markets may experience severe fluctuations. Some analysts believe that the dollar index could plummet by 3%-4% in a short period, and the fixed income market may see significant sell-offs. The dollar and bond markets may face persistent risk premiums, and investors may also worry about the politicization of the Fed's currency swap agreements with other central banks.

However, even if Trump successfully replaces the Fed chairman, the new chairman may still have to face economic realities. If inflation rises again, the new chairman may ultimately have to return to tightening policies.

Overall, Powell's future is not only related to monetary policy but also a contest about central bank independence. Regardless of the outcome, this turmoil will have a profound impact on global financial markets.