Donald Trump needs Jay Powell

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good morning. Here Rob, back from a week in beautiful Santa Fe, tanned, rested and tired of looking at turquoise jewelry. Yesterday, the miserable market gave me a encouraging sense that nothing would change in my absence. If I missed anything, please email me: robert.armstrong@ft.com.

Trump probably won’t try to kick Powell out.

When the president threatens the Federal Reserve chair, the market doesn’t like it. Of course, Donald Trump was tired of Jay Powell before, but yesterday’s production was more acidic than usual, with Trump’s adviser Kevin Hassett coming after the White House told him “continue to study” Trump, a medium-sized central banker. Stocks go down, dollar down, short surrender, long dominance, implicit volatility, and gold rise. ICK.

Expect grausing to continue. But I don’t think Trump would try to fire Powell. I threw the possibility that it was happening at about 10%. I think this is because it is in a simple way, against Trump’s own interests.

Yesterday was a taste of how the market responded to successful attempts to drag Powell out of his job before his term began in May next year. I expect the impact of the primary market and the secondary economic impact of the ending Fed independence to be severe enough to emit political capital controls. This requires legislation to occur before the medium term, and the election will cost Trump’s party the House or Senate. You can complain already I’m being asked around Republicans about Trump’s economic policies. He doesn’t have an endless room to screw around.

(As an aside, it’s equivalent to Powell’s firing, and perhaps even scarier for the market, to become a chair to declare his choice for the next Fed chair and to become a chair to begin declaring policy before taking office.)

It’s not just the high risk of movement that needs to be discouraged from Trump. The return is also low. The impact of destroying central bank independence can be broken down into market shocks and impacts on monetary policy. Market shocks are valuation of stock prices and higher bond term premiums, i.e., lower stock prices and bond prices, i.e., everything is the same, which increases the expected inflation and fee volatility, and is irrelevant to what the newly appointed chair did.

The new chair will likely drive interest rate cuts. That might be the correct call. The negative impact on tariff growth can overwhelm the inflation effect. Or perhaps the inflation effect will be one time only. It’s difficult to predict. But Trump would have paid better monetary policy in a market shock that could easily cause a recession. A recession takes all the fun from low prices. On the other hand, if the rate of reduction is a wrong decision, inflation must return and be higher than they would otherwise have been without significantly reducing the risk of a recession. Also, removing Powell costs a lot. If the economy continues to shake, you don’t have scapegoats. If Trump gets a pet chair, he owns everything no matter what happens.

All this is in exchange for choosing a Fed chair a year earlier than the rest? no thanks. The risk/reward mix to force Powell is terrible, and Trump will probably see it.

(By the way, I said above that the end of the Fed independence would mean a decline in bond prices. Everything else is equal. But everything else may not be the case. If the market shock is bad enough, the bond market could be seen directly in a recession through inflation risk, and bond prices could rise quickly.

Readers should know that Wall Street’s opinion on this issue is broad, after giving my predictions with such confidence. The very large wealth manager’s chief investment officer said yesterday that Trump could drive Powell out:

Very low [as] That would certainly cause a flight of capital from the US. But Trump is frustrated and unlikely he will stop talking about it. As a result, the market will raise prices of paranoia.

The Wall Street strategist agreed:

The odds have been reduced to zero. When you see John Kennedy [Senate] The Banking Committee weighs on the weekends and giving Powell independence, and you want to quickly convey the sense that they are fully realized and that firing Powell will be a body slum for the Treasury and dollars.

Meanwhile, senior executives at large volume funds think that it’s evens odds.

50/50. . . Trump Sorting wins either way. If there is a bear market or a recession, he can blame Biden and Powell, whether he fires him or not. Without either, he can take credit, whether he fires him or not. . . If that happens, it’s not a surprise. The market moves in surprise. I think the talk of fire has already driven the market more than reality. If that happens, I think there will be a short bounce. His replacement is important, and the provisional default is [John] Williams [chair of the New York Fed]this simply means the same thing

Another asset manager CIO thinks it’s likely:

The odds are above 50%. Trump already has little respect for these things and shows that he is completely driven by retaliation

In any case, damage will be done. Expect ongoing pressure on dollars, fees and spills. More and more, foreign investors are becoming disillusioned and continue to separate themselves from us. [Foreign direct investment] It’s a very simple premise – 1) the rule of law 2) the political/structural stability 3) a reliable system for raising and arbitrating a dispute. Three strikes on the US front.

I think there’s more damage left, and if he doesn’t have it yet, Trump will eventually realize this. Betting Marketworth noting, gives a 26% chance to be out by the end of the year. I think that’s too expensive.

One good read

When M&A Guys runs a law firm, the law firm is What the government says to them do.