Fed chair­man’s most pow­er­ful line of de­fense: Wall Street

The Charlotte Observer (Sunday) - - Business - BY RICH MILLER AND EMILY BAR­RETT

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 last week, 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 – Pres­i­dents 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, mul­tias­set spe­cial­ist with T Rowe Price, 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 per­cent 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.”

The ex­pe­ri­ence of some emerg­ing mar­kets may be in­struc­tive. Turk­ish Pres­i­dent Re­cep Tayyip Er­do­gan dam­aged his coun­try’s econ­omy, cred­it­wor­thi­ness and cur­rency with his ham-handed threats against the cen­tral bank ear­lier this year.

The U.S. is no emerg­ing mar­ket, of course. In­deed, some an­a­lysts think U.S. mar­kets might not do that badly if Trump re­placed Pow­ell with a Fed chair op­posed to tighter credit.

“Some in­vestors might cel­e­brate that the Fed is not go­ing to take the punch bowl away,” said Jack Ablin, chief in­vest­ment of­fi­cer at Cres­set Wealth Ad­vi­sors in Chicago.

The dol­lar, though, could be hit as for­eign in­vestors lose faith in the U.S., he said.

Academy Se­cu­ri­ties’ Tchir ac­knowl­edged that a shift in Fed lead­er­ship could be ben­e­fi­cial for the mar­kets, but ar­gued it would be swamped by the un­cer­tain­ties aris­ing from an as­sault on the cen­tral bank’s in­de­pen­dence.

“Even though in the­ory it would be help­ful – be­cause you’d clearly be tak­ing that step to put some­one dovish in – it would be just such a rad­i­cal change and de­vi­a­tion from the norm that volatil­ity would have to in­crease and that would put pres­sure on as­sets,” he said.

AN­DREW HAR­RER Bloomberg

A se­ri­ous move to oust Fed chair Jerome Pow­ell could in­ject un­cer­tainty into U.S. mar­kets.

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