Trump May Not Be Done With Powell Yet

Episode Summary

Executive Summary: The episode examines Donald Trump’s escalating attacks on Fed Chair Jerome Powell and the market, policy, and global-economy risks of undermining central bank independence. Guests Krishna Guha and Kate Davidson argue that merely threatening Powell has already pushed markets toward a “sell America” trade, and that actually firing him could trigger stagflation, higher inflation risk, capital flight, and even a broader fiscal crisis.

Main Topics: Trump’s conflict with Jerome Powell (Priority: 5/5): The discussion traces Trump’s shift from praising Powell in 2017 to openly attacking him over interest rates and even threatening termination, framing Powell as a scapegoat for economic weakness. Market reaction to threats against Fed independence (Priority: 5/5): Krishna Guha explains that stocks, bonds, and the dollar sold off together, reflecting concern that U.S. assets are less attractive if the Fed’s independence is threatened. Why Fed credibility matters for inflation and growth (Priority: 5/5): The guests argue that the Fed’s ability to act independently is what anchors inflation expectations; losing that credibility could turn tariff-driven disinflation into persistent stagflation. Scott Bessent and the case against firing Powell (Priority: 4/5): Kate Davidson notes that Treasury Secretary Scott Bessent and other insiders seem to be arguing that removing Powell is not worth the market chaos, especially since Powell’s term ends next year anyway. Potential replacement and the danger of a ‘sock puppet’ chair (Priority: 4/5): The conversation addresses Kevin Walsh as a possible successor, but concludes that even a credible nominee would lose market confidence if installed through political pressure rather than normal order. From tariff shock to fiscal crisis risk (Priority: 4/5): Guha warns that if Fed independence is attacked alongside tariffs and large deficits, the U.S. could face a broader sovereign-debt-style crisis, though the U.S. remains far more resilient than the UK. Longer-term costs to households and the global system (Priority: 4/5): The episode closes on the idea that higher U.S. risk premia could permanently raise borrowing costs for Americans while eroding the special status of U.S. assets in the global financial system.

Key Arguments: Trump’s attack on Powell is not new; it began soon after Powell was confirmed and intensified as the Fed raised rates in 2018. Markets interpreted the latest rhetoric as a threat to Fed independence, producing a simultaneous decline in stocks, bonds, and the dollar. A real attempt to fire Powell would likely create a much larger market shock and push investors toward stagflation pricing. The Fed’s credibility is currently helping prevent one-off tariff inflation from becoming entrenched in inflation expectations. Scott Bessent’s stance suggests some in the administration understand that forcing the issue could be self-defeating and unnecessary because Powell’s term ends in May next year. Even a strong replacement like Kevin Walsh would struggle to lead credibly if perceived as a political appointee installed to obey the White House. The U.S. is not the UK, but persistent attacks on the Fed plus large deficits could still produce a bond-market revolt or fiscal stress. Higher risk premia on U.S. assets would ultimately mean higher borrowing costs for households and the government. Data Points: Powell’s current chair term end: May next year - Kate Davidson notes the administration has only months before it must consider a replacement anyway. Trump first term nomination: 2017 - Trump originally appointed Powell to succeed Janet Yellen. Fed rate-hiking period referenced: 2018 - Trump soured on Powell as the Fed slowly raised rates after years of very low interest rates. Market reaction described: stocks lower, bonds lower, dollar lower - Krishna Guha characterizes the Monday move as a “sell America trade.” Yield curve movement: steepening - Guha says the yield curve steepened, a typical response to this kind of policy shock. Inflation expectation change: not changed - Guha says market inflation compensation has not moved materially despite tariff turmoil, showing confidence in the Fed’s credibility. Risk scenario: non-trivial risk - Guha says a tariff crisis could morph into a fiscal crisis if confidence weakens further. Market regime assessment: not yet a regime shift - Guha says conditions are serious but do not yet amount to the end of the dollar-based global system.

Pivotal Quotes: "there is virtually no inflation" — Donald Trump: Trump’s social-media post arguing the Fed should cut rates immediately because inflation is low. "The Fed chair put in that context would be seen as Trump's sock puppet." — Krishna Guha: Guha explains why replacing Powell outside normal order would destroy market confidence in the new chair's independence. "we are not yet at the point of a regime shift." — Krishna Guha: Guha’s bottom-line assessment of the current market and policy stress.

Implications: If Trump keeps pressuring the Fed, markets may price higher inflation risk, weaker U.S. assets, and higher borrowing costs. Even without an actual firing, the political assault can raise the long-term cost of capital for households, firms, and the government.