Powell's strongest protector may be Wall Street

The ultimate guarantor of job security for presidential whipping boy Jerome Powell may lie not in Washington, but on Wall Street.

President Donald Trump could confront a huge blowback from the financial markets — with stocks, bonds and the dollar all going down — if he made a serious move to oust the Federal Reserve chairman, market professionals say.

“There would be a very bad reaction in the markets,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management LLC in Minneapolis. Such a move “would introduce an incredible amount of uncertainty.”

The president has been withering in his criticism in recent weeks of Powell and the Fed for raising interest rates, calling the central bank the biggest threat to the economy. Asked by The Wall Street Journal on Oct. 23 if he would consider removing the Fed chair, Trump replied, “I don’t know.”

Trump resumed his broadside on the central bank early Tuesday, tweeting a comment from an analyst who suggested that a more dovish stance from the Fed would push stocks back toward record highs.

Powell and his team have responded to the attacks by saying they’ll do what they think is best for the economy and not be swayed by politics. And what they think is best for now is to continue gradually raising interest rates.

Under the law, Trump can fire members of the Fed’s board “for cause” — an amorphous concept that’s generally come to mean inefficiency, neglect of duty, or malfeasance.

But it’s not clear whether that requirement applies to the job of Fed chair, opening up the possibility that Trump could unseat Powell over policy differences as the central bank’s leader, without removing him from the board.

So far, investors have mostly shrugged off the president’s attacks on the Fed and his calls for it to stop raising rates.

“People have gotten used to a certain amount of rhetoric and grandstanding and statements that are meant to influence the masses, without necessarily having any real policy impact,” said Peter Tchir, head of macro strategy at Academy Securities. “So I’d say the market right now dismisses it.”

Presidential pressure on the Fed is not unprecedented. While Trump’s immediate predecessors — Bill Clinton, George W. Bush and Barack Obama — did refrain from publicly chastising the central bank, those who came before them were not so reticent.

But an overt effort to unseat Powell as Fed chairman would be something else altogether.

“The unintended consequence of a concerted and believable attempt to remove Chairman Powell from office could be quite consequential for financial markets,” Diane Swonk, chief economist at Grant Thornton LLP in Chicago, said in an email. “We would be in uncharted waters, something markets hate.”

Christopher Dillon, multi asset specialist with T Rowe Price Associates Inc., basically agreed.

“What it would represent is a breakdown in the systematic process that helps guide markets, and once you lose faith in that construction, that’s where we would have concern,” he said.

He sees a risk of inflation and bond yields surging if Trump replaces Powell with a more dovish chairman at the same time the government is heading toward a trillion-dollar budget deficit. That in turn would upend stocks.

“If you can go ahead and get to 4-4.5% from a 10-year Treasury what do I need my equity investment for?” Dillon asked. Ten-year yields were around 3.1 percent on Tuesday.

Leuthold Weeden’s Paulsen said some of the damage to the markets could prove long-lasting. “It would be a regime change,” he said. “The markets would probably be stuck with a higher risk premium for quite some time.”

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