TF SECURITIES: What are the potential impacts if the independence of the Federal Reserve is weakened?

According to the Zhitong Finance APP, TF SECURITIES released a research report stating that Trump is considering new candidates for the Federal Reserve Chair, raising market concerns about the "independence" of monetary policy. If Trump nominates a Federal Reserve Chair with MAGA characteristics and close personal ties, it could have four impacts: increased risk of stagflation; heightened fiscal concerns; weakened dollar status and capital flight; and for the market, it could lead to a triple whammy of declines in U.S. stocks, bonds, and currency. If a "black swan" event occurs where the Federal Reserve is held hostage by the White House, U.S. stocks, bonds, and the dollar may be sold off.

1 Who are the candidates, and what are their backgrounds?

Three main candidates: Waller, Hassett, and Walsh.

Waller: Current Federal Reserve Governor, representative of the dovish faction. His advantage lies in his familiarity with the operational mechanisms of the Federal Reserve system. Waller's qualification as a Federal Reserve Governor was appointed by Trump, and his advocacy for interest rate cuts is highly aligned with the White House. If elected, it may raise market doubts about the independence of the central bank.

Hassett: Served as the Director of the White House National Economic Council (NEC). During Trump's administration, Hassett contributed to nearly all economic areas, including the 2017 tax cut legislation, trade policy, and deregulation. His disadvantage is a relative lack of experience in monetary policy and being perceived as too close to the government.

Walsh: Walsh's advantage is his extensive experience on Wall Street, in government, at the Federal Reserve, and in academia. He became a Federal Reserve Governor in February 2006. Walsh is seen as a "dove" and supports Trump's interest rate cut initiatives. His disadvantage is that he has not served in Trump's administration, making it difficult to have direct access to Trump.

Other candidates include current Federal Reserve officials such as Bowman, Jefferson, and Logan; individuals from financial institutions, including Rick Rieder from BlackRock and David Zervos from Jefferies Group; former Federal Reserve officials such as Lindsey and Bullard; and former government economists like Summers.

Recently nominated to become a Federal Reserve Governor, Milan may become a "dark horse." Milan is an advocate for reciprocal tariffs and leans dovish on interest rate issues. Milan advocates for weakening the independence of the Federal Reserve by shortening the terms of governors and allowing the president to dismiss governors, which has led to widespread concerns about undermining the central bank's credibility.

2 How is the process and rules for changing the Federal Reserve Chair?

The president typically announces the nominee 3-6 months in advance, with an average time of 4 months from nomination to inauguration. If Trump announces the nominee as early as September-October this year, TF SECURITIES believes it may raise market doubts about Trump's "impatience" in establishing a "shadow Federal Reserve."

After Powell steps down as Chair, he is expected to likely resign from his governor position and leave the Federal Reserve; however, there is historical precedent for former Chairs to continue serving as Federal Reserve Governors. Among the current seven governors, aside from Milan and Powell, the terms of the other governors extend beyond 2028, making it difficult for Trump to intervene

3. What are the potential impacts if the independence of the Federal Reserve is weakened?

If Trump nominates a Federal Reserve chairman with MAGA tendencies and close personal ties, TF SECURITIES believes there could be four impacts: First, the risk of stagflation rises. Nixon's intervention in the policies of Federal Reserve Chairman Burns in the 1970s laid the "roots of disaster" for the stagflation of 1973-1974. The current impact of tariffs on inflation is still unclear; if a closely connected new Federal Reserve chairman is appointed, the market may worry about a repeat of the Burns "script."

Second, fiscal concerns may intensify. Currently, the high deficit rate and continuously rising debt in the U.S. have raised market concerns about the safety of U.S. Treasury bonds. If the independence of the Federal Reserve is lost again and it becomes a tool to accommodate fiscal policy, worries about a debt crisis may worsen.

Third, the status of the dollar may weaken, leading to capital flight. The dominant position of the dollar as the world's reserve currency largely depends on the credibility of the Federal Reserve. If the Federal Reserve is seen as politically controlled, foreign official institutions and market investors may accelerate the diversification of dollar asset allocations, turning to alternative assets such as gold.

For the market, this could lead to a triple whammy for U.S. stocks, bonds, and the dollar. In July of this year, the financial market experienced a stress test of "removing Powell," confirming the market's high regard for the "independence" of the Federal Reserve. Once a "black swan" event occurs where the Federal Reserve is hijacked by the White House, U.S. stocks, bonds, and the dollar may be sold off