The Fed Chair Faces Unprecedented Political Pressure

Fed Chairman Powell is in the most challenging period of his career. On one hand, he faces policy dilemmas brought about by a complex economic situation; on the other hand, he has to deal with immense pressure from the political arena.

The conflict between Powell and a certain political figure has a long history, with the core point of contention being the direction of monetary policy. This political figure hopes to cut interest rates to stimulate the economy, while Powell insists on his own judgment. This divergence has continued since 2018 and has intensified over time.

Interestingly, when Powell first took office as Fed Chair, he was nominated by this politician. However, just a few months later, their relationship took a sharp turn for the worse. Starting in October 2018, this politician publicly criticized Powell's policy stance, accusing the Fed of raising interest rates too quickly as the "biggest threat."

As we enter the election year of 2024, the situation is further heating up. This politician has repeatedly called for Powell to resign. However, under U.S. law, the president does not have the authority to remove the Fed chair due to policy differences, unless there is evidence of "illegal or gross misconduct."

In July of this year, a new twist emerged in the situation. The team of this political figure suddenly made a new accusation: the renovation project of the Fed headquarters is suspected of serious violations. They demanded Congress investigate Powell, accusing him of "having a political bias" and "making false statements to Congress."

Meanwhile, rumors are circulating that Powell is "considering resigning", causing the entire event to escalate rapidly. This power struggle that has lasted for seven years seems to be reaching its climax.

In response to these accusations, Powell chose to face them head-on. He requested the Inspector General to continue reviewing the headquarters renovation project and explained in detail through official Fed channels the reasons for the cost increase, refuting the accusations of "luxurious renovations."

Currently, Powell is facing severe economic challenges. On one hand, certain policies may lead to upward pressure on prices; on the other hand, the labor market has already shown signs of cooling. This dual pressure poses a significant challenge to the Fed's decision-making.

If the Fed lowers interest rates too early, it may lead to uncontrollable consumer inflation expectations; if it chooses to raise interest rates to stabilize inflation, it may trigger turmoil in the bond market, soaring interest rates, and even cause a "financial panic."

If Powell really resigns, the global financial markets may experience severe fluctuations. Some analysts believe that the dollar index could plummet by 3%-4% in the short term, and the fixed income market may see a sell-off of 30-40 basis points. The dollar and bonds may face ongoing risk premiums, and investors may also worry about the political influence on the Fed's currency swap agreements with other central banks.

Some experts point out that the "likelihood of Powell stepping down early is lower," but if it does happen, it could lead to a steepening of the U.S. Treasury yield curve, as investors would anticipate lower interest rates, accelerated inflation, and a weakening of the Fed's independence. In this scenario, the dollar may face depreciation pressure.

For risk assets, if the Fed suddenly starts cutting interest rates in a stable economy with low unemployment, it could boost market sentiment in the short term, including the cryptocurrency market. However, considering that current interest rates are still relatively high, there may still be a significant amount of liquidity that needs to be released in the future.

Powell's departure or stay is not only related to monetary policy but also involves the independence of the Fed. The outcome of this game will have a profound impact on global financial markets.