By Saqib Iqbal Ahmed
NEW YORK (Reuters) -Uncertainty over Federal Reserve Chair Jerome Powell’s tenure is prompting investors to assess potential market reactions should there be an premature change in leadership at the U.S. central bank.
President Donald Trump has repeatedly criticized Powell for not cutting U.S. rates quickly enough. He has frequently raised the possibility of ousting him before his term is up in ten months, while also saying that firing him would be “unlikely.”
Trump said on Thursday he had a “good meeting” with Powell after he visited the Federal Reserve’s headquarters in Washington to tour the site of a $2.5 billion renovation of two historical buildings the White House criticizes as overly costly and ostentatious. He said it is not necessary to fire Powell.
Investors have been considering various scenarios, including Trump dismissing Powell, the Fed chief stepping down, or a new nominee being named well before the scheduled end of Powell’s term.
Forecasting how equities, the U.S. dollar, and Treasury yields would react to each outcome is difficult, market participants said.
However, brief turbulence last week — when reports emerged that Trump was considering firing Powell — triggered a 0.7% decline in the S&P 500 and a 0.9% drop in the dollar, offering some clues to possible market reactions, they added.
“Financial markets have sent clear warning signals about the consequences of political interference,” Jack Ablin, chief investment officer at Cresset Capital, said.
“YOU’RE FIRED”
While deemed the most unlikely scenario, the biggest risk for markets is if Trump were to fire Powell. Such a move would be viewed as an assault on the independence of the Fed, something the market counts on, investors said.
Based on the scale of gyrations markets recently experienced, strategists at Deutsche Bank estimate the dollar could tumble as much as 6%, potentially a record large drop.
Deutsche Bank’s strategists estimate the 10-year yield could jump up about 20 basis points while the 30-year yield could soar 45 basis points. On Thursday, the 10-year yield was at 4.413%, while the 30-year bond was at 4.942%.
While equities might eventually find something to like in a new Fed Chair who might be more amenable to rate cuts, investors said stocks would likely initially sell off if Powell is shown the door.
Cresset’s Ablin said the drop in stocks would be more extreme than the less than 1% slide spurred by last week’s reports on Powell’s imminent firing.
