Cathay Securities: Dismissing Powell is high difficulty, low return, high risk, and has a low probability

According to the Zhitong Finance APP, Guotai Junan published a research report stating that firing Powell is a high-difficulty, low-return, and high-risk action, with a low probability. Subsequently, Trump is more likely to exert influence by announcing a successor in advance. Considering the significant internal disagreements on monetary policy within the Federal Reserve, Trump's efforts to reshape the Federal Reserve may also be relatively limited. Trump's attacks on Powell are a manifestation of "fiscal anxiety." The passage of the "Big Beautiful Plan" confirms that the U.S. is deepening its path dependence on pro-cyclical deficits, at the cost of facing high debt issuance costs and declining acceptance of long-term bonds. Pressuring the Federal Reserve is a "bad move" to address fiscal anxiety, which has quick effects but significant side effects. Once investors foresee threats to the independence and transparency of monetary policy, the probability of a "triple kill" scenario in stocks, bonds, and currencies will significantly increase.

Guotai Junan's specific views are as follows:

Since control over interest rates cannot be obtained in the short term, the White House is working to seize control over the money supply from the Federal Reserve. The recently passed stablecoin legislation not only alleviates the debt issuance pressure on the Treasury but also deprives the Federal Reserve of the right to issue digital currency, thereby creating a "shadow Federal Reserve" represented by stablecoin issuers, expanding the White House's control and regulatory scope over the money supply.

The design of the Federal Reserve's independence mechanism presents Trump with threefold obstacles in achieving his vision of interest rate cuts:

First, legal provisions prohibit the arbitrary dismissal of the Federal Reserve Chair.

Second, recent court rulings have emphasized the Federal Reserve's policy independence.

Third, the Federal Open Market Committee, which holds the authority to decide on interest rate resolutions, operates on a voting system requiring a 2/3 majority. According to recent statements from committee members, aside from Bowman and Waller who support a quick rate cut, most members still prefer to maintain the status quo.

Historical experience shows that the Federal Reserve's credibility in maintaining price stability is crucial. During Burns' tenure as Federal Reserve Chair, he faced political pressure from President Nixon and implemented overly loose monetary policies from 1971 to 1972, which is a classic case of compromised Federal Reserve independence in history. Although loose monetary policy temporarily boosted the U.S. economy, it also laid important hidden dangers for subsequent stubborn inflation in the U.S. The Federal Reserve's credibility in maintaining inflation targets is hard-earned, and the loss of its independence and a "stop-and-go" attitude in monetary policy would increase the risk of inflation expectations becoming unanchored. Once credibility is lost, restoring it will require a high cost.

How will the leadership change unfold? Guotai Junan believes that firing Powell is a high-difficulty, low-return, and high-risk action, with a low probability. Subsequently, Trump is more likely to exert influence by announcing a successor in advance to avoid damaging the credibility of the Federal Reserve's independence. Considering the significant internal disagreements on monetary policy within the Federal Reserve, Trump's efforts to reshape the Federal Reserve may also be relatively limited.

Risk warning: Trump’s accountability measures exceed expectations, and Powell is forced to resign.