CICC: How to Trade if Key Federal Reserve Officials Leave Early?

CICC released a research report analyzing the impact of the Federal Reserve Chairman's early departure, believing that this will be bearish for the dollar, bullish for gold, and may drive up stock market valuations. If the Chairman serves his full term, the U.S. Treasury is expected to net issue about $1.2 trillion in U.S. Treasury bonds in the third quarter, which may lead to liquidity tightening and ultimately prompt the Federal Reserve to restart balance sheet expansion. CICC expects that during Trump's second term, monetary and fiscal policies will normalize, and U.S. liquidity will remain abundant in the long term

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that if the Federal Reserve Chairman were to resign early, assuming other conditions remain unchanged, it would be bearish for the US dollar and bullish for gold. The short end of US Treasury bonds would experience a steep bull market, while the mid to long end would see a steep bear market until the Federal Reserve resumes balance sheet expansion, which would suppress long-term interest rates. Benefiting from the liquidity cycle expected to restart earlier, the stock market valuation may be positively impacted in the short to medium term. However, if the Federal Reserve Chairman completes the current term normally, CICC expects the US Treasury to net issue approximately $1.2 trillion in US Treasury bonds in the third quarter, which could lead to liquidity tightening, ultimately forcing the Federal Reserve to restart balance sheet expansion and the liquidity cycle, still benefiting US stocks and gold while being bearish for the US dollar. CICC predicts that during Trump's second term, the combination of monetary and fiscal policy will become normalized, and US liquidity is expected to remain abundant in the long term.

CICC's specific analysis is as follows:

Trump threatens to fire the Federal Reserve Chairman

On July 16, Trump stated that he would fire Federal Reserve Chairman Jerome Powell, but later denied it. Since taking office, Trump has repeatedly pressured the Federal Reserve to cut interest rates quickly. Essentially, Trump's dissatisfaction with the Federal Reserve stems from its failure to align monetary easing with his "big fiscal" plan. The "Great Beautiful Act" was finally passed on July 4, and the Committee for a Responsible Federal Budget (CRFB) estimates that it will increase federal debt by $4.1 trillion over the next ten years. If the temporary tax cuts are made permanent, the debt increase could reach $5.5 trillion. It is expected that the deficit rate during Trump's 2.0 term may remain around 6.5%-7% (see "Trump 2.0: Furthering the Big Fiscal"). In the short term, CICC expects the US Treasury to net issue about $1.2 trillion in Treasury bonds in the third quarter, which could lead to liquidity tightening (see "Trump 2.0: Furthering the Big Fiscal"). With high interest rates, interest payments on US Treasury bonds are expected to continue to grow rapidly, and the pressure of debt and deficits makes Trump hope for continued monetary policy easing to complement fiscal dominance, in order to alleviate the debt burden and stimulate nominal economic growth. Against this backdrop, the conflict between Trump and the Federal Reserve over interest rate cuts is becoming increasingly prominent.

The rules and mechanisms for the US President to fire the Federal Reserve Chairman

The rules and mechanisms for the US President to fire the Federal Reserve Chairman are somewhat ambiguous. The Federal Reserve Chairman and Vice Chairman are nominated by the President and must be confirmed by the Senate, serving a term of four years, but this is only for the position of Chairman; their term as a board member remains 14 years. The Federal Reserve Board members have relatively clear "grounds for dismissal," as stipulated in Section 10 of the Federal Reserve Act of 1913, which states that Federal Reserve board members can be "removed by the President for cause," but the law does not specify what constitutes "for cause," nor does it indicate whether the President has the authority to fire the Federal Reserve Chairman. Among the past Federal Reserve Chairmen, four have voluntarily resigned due to political pressure or political compromise, but there has been no case of a President directly firing a Federal Reserve Chairman. In May 2025, the US Supreme Court clarified that the Federal Reserve is a "structurally unique quasi-private entity," and its independence is specially protected, meaning the President cannot fire the Chairman due to policy disagreements.

Regardless of whether the Federal Reserve Chairman resigns early, the independence of the Federal Reserve is being challenged. Research has found that the Federal Reserve is often influenced by political pressure from the US President. Historically, the frequency of contact between the US President and the Federal Reserve, as well as the impact of political pressure, can affect Federal Reserve policy, especially during the 1960s and 1970s when fiscal dominance and twin deficits became increasingly severe, significantly weakening the Federal Reserve's independence Based on this research, strict independence essentially existed during the Volcker and Greenspan eras, when the trend of fiscal deficits improved. When political pressure is high, the Federal Reserve tends to tolerate a higher inflation target.

Historical Shocks to Federal Reserve Independence

The first shock occurred in 1933, when President Roosevelt announced a ban on gold exports in response to the "Great Depression," prohibiting the Treasury and financial institutions from exchanging currency and deposits for gold coins and bullion, officially suspending the gold standard and raising the gold price from $20.67 per ounce to $35 per ounce, resulting in a depreciation of the dollar by over 40%. The Federal Reserve lost its dominance in monetary policy and was forced to cooperate with fiscal expansion policies, marking the first systematic weakening of its independence. The second shock occurred in 1971, when Nixon pressured then-Federal Reserve Chairman Burns to lower interest rates in 1971 to ensure his re-election in the 1972 presidential campaign, and Burns, also a Republican, ultimately yielded. Additionally, in August 1971, Nixon announced the decoupling of the dollar from gold, signaling the end of the post-war global monetary "Bretton Woods system." Since the 1980s, under the leadership of Volcker and Greenspan, the Federal Reserve has reshaped the credibility of U.S. monetary policy, anchoring inflation expectations and becoming a significant factor behind the U.S. economy entering the "Great Moderation" era. Coincidentally, both instances of direct intervention by the U.S. government in the Federal Reserve occurred during periods of loose fiscal discipline, where monetary policy often had to align with fiscal policy. Currently, due to debt reduction pressures (see "Trump's 'Great Reset': Debt Resolution, Real Economy Transition, Dollar Depreciation"), Trump is continuously increasing pressure on the Federal Reserve, which may again harm its independence. Regardless of whether the Federal Reserve Chairman resigns early, CICC expects that Trump 2.0 will likely adopt a fiscally dominant and financially restrictive approach, with monetary policy coordinating with fiscal policy, leading to a trend of ample dollar liquidity.

Asset Implications of Early Resignation of the Federal Reserve Chairman

Historically, after the events of March 1933 and August 1971, the dollar weakened, gold strengthened, the short-term trend of the S&P 500 rose, and the U.S. Treasury yield curve steepened. In terms of equities, although the specific rhythms varied, the S&P 500 overall showed a pattern of high followed by low, with cumulative returns of 72% and 14% over 1 and 2 years, respectively, and 35% and 7%. Regarding the dollar, gold prices rose, especially after the collapse of the "Bretton Woods system" in 1971, with gold prices increasing by 57% within one year and 150% within two years, while the dollar index fell by 18% over two years. After the events, the U.S. Treasury yield curve exhibited steepening.

Chart 1: Federal Reserve Chairmen Who Resigned Before Their Terms Ended

Source: Federal Reserve History, CICC Research Department Chart 2: Impact of Political Pressure and Frequency of President-Federal Reserve Interaction