The independence of the Federal Reserve faces unprecedented scrutiny, and the uncertainty surrounding Powell's tenure poses a hidden risk of a "double whammy" for the US dollar and US Treasury bonds
U.S. Treasury prices fell due to Trump's criticism of Federal Reserve Chairman Jerome Powell, raising concerns in the market about political interference in central bank independence. The U.S. Treasury yield curve rose across the board, with the 10-year Treasury yield climbing to 4.47%. Although Trump stated that it is unlikely he would fire Powell, the ongoing pressure has left investors uneasy. Analysts warn that if Powell is forcibly replaced, the dollar could plummet by 3%-4%, and U.S. Treasury yields could surge by 30-40 basis points. Powell's term will end in May next year, and the market is highly concerned about the manner of his departure
Zhitong Finance APP noted that U.S. Treasury prices fell as the market digested the shockwaves from President Trump's latest criticism of Federal Reserve Chairman Powell. On Thursday, the U.S. Treasury yield curve rose across the board, with the 10-year Treasury yield slightly up by 1 basis point to 4.47%, and the 30-year Treasury yield remaining above 5%.
On Wednesday, U.S. Treasuries experienced significant volatility due to reports that Trump planned to fire Powell. Short-term bonds briefly rose on heightened expectations of interest rate cuts, but Trump later stated there were no plans for a replacement. Despite Trump’s repeated criticisms of Powell this year, the escalation of this situation has raised concerns among investors about potential political interference in the central bank.
The global head of economic and cross-asset research at Société Générale stated, "The central bank's greatest asset is its credibility; if it is damaged due to a change in leadership, the market reaction will be extremely negative," adding, "This will trigger significant volatility," and that speculation about a successor would further exacerbate fluctuations in U.S. Treasuries and the dollar.
Although Trump stated it is "highly unlikely" he would fire Powell, he continues to apply pressure, reiterating that the Federal Reserve is maintaining rates too high and refusing to "rule out any possibilities." Traders are awaiting the retail sales and initial jobless claims data to be released on Thursday.
George Saravelos, head of foreign exchange research at Deutsche Bank, pointed out that as long as the threat from Trump remains, related concerns will continue to suppress the dollar and U.S. Treasuries. On Wednesday, the dollar index fell and then rose, continuing to increase by 0.3% on Thursday, but the bank warned that if Powell were forcibly removed, the dollar could plummet by 3%-4%, and Treasury yields could surge by 30-40 basis points.
Nevertheless, as Powell's term is set to end in May next year, Saravelos expects these adverse factors to gradually dissipate. He added that the manner of his departure is crucial.
Saravelos stated, "As the date of Powell's departure approaches, this should at least alleviate some extreme tail risks and the risk of institutional coercion against the Federal Reserve."
He believes that if this process is "disorderly," Powell may be asked to leave, but if he refuses, it would be "a very bad situation."
Ben Hamou, head of derivatives sales at JP Morgan, pointed out that the independence of the Federal Reserve is essentially a "myth," advising clients to go long on the S&P 500 index and volatility index, betting that expectations of interest rate cuts will boost risk assets, while tariffs, inflation, and uncertainties regarding Federal Reserve personnel will exacerbate market volatility.
He cited the historical example of President Johnson pressuring Federal Reserve Chairman Martin in 1965, stating, "The current public drama has been secretly ongoing for decades." As Powell's term nears its end, the market will begin to price in the policy direction of the next chairman. He advised clients to continue holding the S&P 500 index and volatility index, betting that investors will increase their investments in risk assets such as cryptocurrencies and artificial intelligence, and that uncertainties regarding tariffs, inflation, and the Federal Reserve will heighten market volatility.
Executives from the three major Wall Street firms emphasized that the Federal Reserve's autonomy is crucial. However, interest rate decisions require the majority support of the Federal Open Market Committee, and the new chair must persuade colleagues to support a rate cut. The latest dot plot shows that officials still have differing views on the path for rate cuts this year, primarily due to varying opinions on the impact of Trump's tariffs on inflation.
Benhamou stated, "I don't think Powell will really be fired, but that really doesn't matter at the moment because the market will soon realize he is being artificially sidelined and will start predicting what the next chair will do." "Whether it's Haskett, Waller, or Walsh, there's no doubt that the dovish competition will only intensify."
