Jiangyin International: The Federal Reserve "Trump" upgrades to focus on dollar credit risks and other capital market trends

According to the Zhitong Finance APP, Jiangyin International released a research report stating that in terms of interest rate cut prospects, the impact of tariffs has a lagging effect and has not yet fully manifested, and it may require inflation data from the next two months for verification, such as the transmission of commodity price pressures. Additionally, the "reciprocal tariffs" are suspended until early August, making it difficult to see a clear tariff situation before then. As of now, only a few countries have reached preliminary tariff framework agreements. Under the baseline scenario, the credit risk of the US dollar, especially the trends in the capital market, may become Trump's "Achilles' heel," limiting his claims regarding tariffs and dismissing Powell. It is expected that there will be 1-2 interest rate cuts throughout 2025, with the first cut possibly occurring in the fourth quarter.

Jiangyin International's main viewpoints are as follows:

The dispute between Trump and Powell can be traced back to the Trump 1.0 era, with the core disagreement being the opposing monetary policy philosophies: Trump has consistently advocated for maintaining a low-interest-rate environment, while Powell insists on a decision-making path based on economic data and inflation targets. In July 2025, the dispute escalated. Unlike previous scattered criticisms and threats, Trump has for the first time proposed specific "legal grounds," and the market has realized that the Trump administration may be seriously studying feasible paths to bypass legal constraints to dismiss the Federal Reserve Chairman. This move has raised unprecedented concerns in the market about the independence of the Federal Reserve and may create a "precedent effect," potentially shaking the foundation of US monetary policy independence.

Trump hopes to significantly pressure the Federal Reserve to cut interest rates to lower long-term rates, thereby alleviating the government's debt burden, reflecting a different understanding of the transmission mechanism of monetary policy, or being driven by political motives. The Federal Reserve's policy rate mainly affects the short-end yield curve, while long-term Treasury yields reflect the market's comprehensive judgment on future inflation expectations, economic growth prospects, and fiscal sustainability. Even if Trump successfully forces the Federal Reserve to cut rates significantly, if the market believes that such policy intervention will trigger future inflation risks or harm the independence of the Federal Reserve, long-term rates may actually rise significantly.

Considering factors such as legal obstacles, political costs, and market reactions, the likelihood of Trump dismissing Powell is relatively low, and the feasibility of such a dismissal is also low and unwise. The rational logic chain supporting this viewpoint is: Trump's goal is to lower interest rates and reduce the government's interest payment pressure; however, dismissing Powell cannot achieve this goal and may instead trigger market turmoil, so the optimal solution is to take no action.

The market may be overly focused on Powell's past policy performance while underestimating his achievements as Federal Reserve Chairman in maintaining internal unity and decision-making consistency. Powell's term lasts until May 2026. He has publicly stated that he will not resign and denies that Trump has the right to dismiss him due to policy disagreements. His firm stance in the face of political pressure has also earned him respect and support from committee members. Therefore, whether the Trump administration plans to demote Powell or exert policy pressure through a shadow Federal Reserve, considering Powell's current policy influence, these measures may all be ineffective.

The core value of the Federal Reserve's independence lies in institutional credibility. This credibility is built on decades of professional operations and crisis responses and is the cornerstone of the stable operation of the modern financial system. Once credibility is damaged, recovery will take a long time During this period, the U.S. financial system will have to bear higher risk premiums and greater volatility, with the costs ultimately borne by society as a whole. Therefore, the independence of the Federal Reserve is not only a technical institutional arrangement but also a guarantee for maintaining financial stability and economic prosperity. Any attempt to undermine this independence could trigger systemic risks far beyond expectations