Now it’s spiraling drama over Federal Reserve autonomy that frazzled investors must cope with as stocks lurch toward a bear market.
Word President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell was going down poorly Saturday on Wall Street, a place not known for its sympathy with Powell’s policies. Most investors saw the prospect as ill-advised meddling that could sow more agitation in a stock market that just had its worst week in almost a decade.
“There’s an old joke: the beatings will continue until morale improves,” said Keith DeGreen, chief executive officer at DeGreen Capital Management LLC in Scottsdale, Arizona. Ousting a Fed chief because his policies are scaring investors “will likely spur more selling, ironically,” he said.
While views were nearly unanimous that firing Powell would have grave implications in the long term, of more immediate interest was the impact of another Trump soap opera on already hair-trigger markets that reopen Sunday in New York. Volatility in U.S. equities surged to a 10-month high on Friday and U.S. exchanges just reported the heaviest two-day volume since 2011.
Given all the currents swirling, traders didn’t rule out a bounce -- whether on reflexive disdain for Powell’s policies or simply because of the steepness of last week’s decline. Betting on minute-to-minute swings has been a good way to go broke recently, with up-and-down moves in the Dow averaging around 700 points last week.
“The threat alone is highly unlikely to impact markets, which have become de-sensitized to all the noise and tweets from the White House,” said Kristina Hooper, chief global market strategist for Invesco. “After all, he’s been complaining about him for months now. But I believe we’d see a strong negative reaction in markets if the president did in fact fire Powell since that sends a message that the Fed is no longer independent or apolitical.”
Trump has discussed firing Powell as his frustration rose following this week’s rate hike and months of stock tumult, according to four people familiar with the matter. Advisers close to the president aren’t convinced he would move against Powell and are hoping his anger dissipates over the holidays, the people said on condition of anonymity.
On Saturday, Treasury Secretary Steven Mnuchin said in a pair of tweets that he’d spoken with the president about the matter and included a statement he said came from Trump. “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so,” Mnuchin quoted Trump as saying. Earlier, White House Press Secretary Sarah Sanders said she doesn’t know of a plan to fire Powell.
Markets would “erupt” if he did, said Nick Sargen, chief economist with Fort Washington Investment Advisors. “It would be construed as a loss of the Fed’s independence, and the dollar would sell off along with stocks.”
While warning against unnerving markets, analysts also acknowledged that Powell is unlikely to win any popularity contests among traders right now. His program of pushing up borrowing costs even as inflation expectations ease is blamed for exacerbating and even causing the meltdown in equities.
“The market had its worst week in 10 years because of Powell,” said Jim Bianco, president of Bianco Research LLC in Chicago. Investors think he’s “making a giant policy mistake. So Powell’s approval rating on Wall Street is crashing like the Dow Jones,” Bianco said. “If the stock market continues lower next week, the Fed’s credibility will be in real trouble.”
Asked if Trump’s animosity will backfire and stiffen Powell’s resolve, Bianco said: “No, I do not think the Fed will turn more hawkish, not at all. Right now they are huddled and discussing why the stock market sold off.” He added: “They are worried about the market reaction to their FOMC meeting, not Trump.”
Fed angst was at the center of last week’s market cyclone, in which the S&P 500 tumbled 7.1 percent and the Nasdaq Composite Index became the biggest U.S. equity gauge to enter a bear market since the financial crisis. The Federal Open Market Committee raised interest rates for the fourth time this year on Wednesday and Powell downplayed the role of market turbulence in setting policy, disappointing bulls who hoped for broader acknowledgement of their plight.
While oversold markets could easily ignore news of the discussions and bounce before Christmas, “if he tries to fire Mr. Powell, it will be very negative,” said Matt Maley, equity strategist at Miller Tabak & Co. “People would become more convinced that the president has become unhinged. His tweets and comments would finally be seen as going too far.”
It’s unclear how much legal authority the president has to fire Powell. The Federal Reserve Act says governors may be “removed for cause by the President.” Since the chairman is also a governor, that presumably extends to him or her, but the rules around firing the leader are legally ambiguous, as Peter Conti-Brown of the University of Pennsylvania notes in his book on Fed independence.
“Seems like the story is running like wildfire,” said John Spallanzani, portfolio manager at Miller Value Partners. “I have no idea if it’s true. I trust Treasury Secretary Mnuchin and others in the administration to dissuade the president from taking such action.”
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