The repercussions of firing Jerome Powell

The President has threatened to remove the Fed Chair several times.

Transcript

00:00We've heard a lot of talk, a lot of chatter about the Fed's independence being in jeopardy.

00:05And we have President Trump potentially meeting with Fed Chair Powell, or at least the Fed,

00:10later today, the first president to do so in some 20 years.

00:13How concerned are you that Fed Chair Powell's job is at jeopardy,

00:17but even more so that the independence of the Fed could be at risk here?

00:23I'm not a legal expert. I can't tell you.

00:24It appears that the president cannot fire Chair Powell, but this administration has found ways to circumvent court decisions in the past.

00:33One never knows.

00:34Certainly, I think, like most market participants, I would hope that that is not the case,

00:38because an independent Fed is so critically important.

00:42The pressure campaign isn't helpful.

00:45But, look, if the president were to remove Powell, or as you say, let's broaden it out and say,

00:49what if the Fed's independence is called into question, I think that has the potential to be very disruptive,

00:55particularly in fixed income markets.

00:57And the reason is that, historically, central banks that aren't independent accommodate and tolerate higher inflation.

01:03Doing what is politically expedient usually means stimulating growth.

01:07And stimulating growth can be inappropriate, depending on the circumstances of the economy.

01:11And so I would expect, in that world, that bond market investors would have to put additional inflation premium into bond markets,

01:18and that would likely push longer-dated yields up.

01:21It's sort of contrary to the administration's objectives of lowering yields, right?

01:25I think that if they were able to remove Chair Powell or compromise the Fed's independence,

01:30it might be counterproductive from their point of view.

01:33We talked about mortgage rates, right?

01:35Mortgage rates are indexed to longer-dated bond yields.

01:37And if bond yields go up, so too do mortgage rates.

01:40And if you reduce the Fed's independence and inflation expectations go up, that's exactly what happens.