How Trump's palace intrigue with Powell affects the interest rate cut in September

Last Thursday (July 24), Trump visited the Federal Reserve headquarters to inspect the renovation of the Federal Reserve building, becoming the first president to visit the Federal Reserve headquarters in nearly twenty years. Since Trump took office in January this year, he has repeatedly criticized Federal Reserve Chairman Jerome Powell, demanding interest rate cuts. Recently, the Trump administration attempted to use the Federal Reserve's renovation issue to dismiss Powell, leading to a tense relationship between the two. Their meeting felt more like a palace intrigue, with an underlying understanding of each other's intentions...

I. Trump Strives to Discredit Powell and Push for Rate Cuts

Journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," analyzed last week that the controversy surrounding the Federal Reserve's renovation has effectively shifted this struggle from policy debate to a more publicly influential arena of public opinion. Trump is attempting to erode Powell's public trust to force him to make concessions on interest rate policy, or even ultimately resign.

In early July, Trump's "Great Beautiful Plan" was passed, and U.S. debt will further increase in the coming years. For the U.S., which is already mired in debt, addressing fiscal issues is the Trump administration's top priority. If the Federal Reserve cuts interest rates, U.S. Treasury yields will fall, which is undoubtedly the most effective means of reducing fiscal expenditure. Trump has repeatedly called for the Federal Reserve to lower the current benchmark interest rate of 4.25%-4.5% by about 3 percentage points. He claimed at a White House meeting on Tuesday, "With just a stroke of the pen (implementing rate cuts), we can save over $1 trillion."

II. Current Market Focus on Whether the Federal Reserve Will Cut Rates in September

Since the beginning of this year, market expectations for Federal Reserve rate cuts have been tumultuous. At the beginning of the year, with Trump's ascension, market optimism waned, while de-dollarization prompted increasing expectations for Federal Reserve rate cuts. By early April, Trump's unexpectedly aggressive reciprocal tariff measures impacted global financial markets, causing U.S. stocks to plummet. Expectations of a recession in the U.S. surged, leading to the belief that the Federal Reserve would soon cut rates to rescue the economy, with expectations for rate cuts exceeding 100 basis points at one point during the year. Soon after, Trump announced a 90-day delay on reciprocal tariffs, alleviating market pessimism and leading to a strong rebound in U.S. stocks. However, concerns began to arise that Trump's tariff policies could lead to a rebound in inflation, causing expectations for rate cuts to weaken, with current expectations for rate cuts this year being less than twice.

With no possibility of rate cuts in July, the market's current focus is on whether the Federal Reserve will cut rates in September. Currently, the implied rate cut in September from interest rate futures is 16.6 basis points, with a probability of only 66.4%. Trump is very eager for rate cuts and will undoubtedly demand the Federal Reserve to initiate cuts as soon as possible.

III. What Means Does Trump Have to Force the Federal Reserve to Cut Rates

One is to remove Powell from the position of Federal Reserve Chairman. Legally, the U.S. president cannot directly remove the Federal Reserve Chairman unless there is sufficient evidence proving that the Chairman has committed illegal acts, gross negligence, or is mentally unfit. If this method is used, it would require legal processes, and it is estimated that by the time Powell's term ends in May next year, it may not be implemented Moreover, currently, Powell has no substantial fault, and Trump cannot simply dismiss Powell just because the Federal Reserve does not cut interest rates. Treasury Secretary Mnuchin has also repeatedly advised Trump against doing so, as it could likely lead to turmoil in the financial markets.

Secondly, announce the new chairman's candidate in advance. Powell's term ends in May next year, and Trump could completely announce the new chairman's candidate in advance, which would significantly weaken Powell's influence. Former U.S. President Nixon did this; after being elected president in 1969, Nixon asked then-Federal Reserve Chairman William Martin to cut interest rates, but the Federal Reserve ignored it. Nixon publicly declared, "You are pushing the U.S. economy into recession." William Martin's term as Federal Reserve Chairman was not set to expire until 1970, but Nixon announced in 1969 that the new Federal Reserve Chairman would be Burns, effectively sidelining William Martin in advance.

Thirdly, insert his own people among the Federal Reserve governors. Federal Reserve Governor Kugler's term expires in January next year, and Trump can nominate his own person to take over that position, thereby partially influencing the Federal Reserve's monetary policy.

Fourthly, suppress public opinion against the Federal Reserve. Trump has repeatedly criticized the Federal Reserve's monetary policy, even calling Powell "Mr. Too Late," and stating that Europe has cut interest rates nine times, and the Federal Reserve should have cut rates long ago. If economic issues arise or inflation stabilizes, the White House will inevitably exert greater pressure on the Federal Reserve. Currently, the U.S. benchmark interest rate is 4.25%-4.5%, indeed the highest among developed countries (excluding Japan), which is over 200 basis points higher than the European Central Bank's benchmark rate, making Trump very angry.

The struggle between Trump and Powell essentially reflects the fundamental divergence between institutional independence and populism. Trump's "MAGA policy" requires the Federal Reserve to cut interest rates to reduce fiscal spending and alleviate fiscal pressure. However, due to Trump's tariff policy, there is pressure for a secondary rebound in U.S. inflation, and Powell is hesitant to cut rates hastily, thus waiting and waiting. However, the independence of the Federal Reserve is only superficial; fundamentally, it still needs to align with the interests of the U.S. government. As long as U.S. inflation pressure is not significant in the next two months, the Federal Reserve is likely to cut rates in September. Powell can then fully state that they have maintained the independence of the Federal Reserve, but considering the restrictive nature of high interest rates on the economy, a preventive rate cut of 25 basis points is warranted, as the Federal Reserve did in July 2019.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances Invest based on this, and you bear the responsibility