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CNN
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This past April, when President Donald Trump started flirting with the notion of firing Federal Reserve Chair Jerome Powell, stocks and the dollar tumbled because investors worried that even talking about such a move crossed a red line. You can’t even joke about that, the Wall Street intellectuals told us — the central bank’s independence is simply too important.
Powell himself said it was not permitted under the law, and a choir of Wall Street analysts chirped about the sanctity of the Federal Reserve’s independence.
Cut to July: Trump is waving a draft of Powell’s termination letter in front of lawmakers, and Wall Street is cruising.
Stocks remain near record highs. The dollar and bond markets briefly jolted but recovered after Trump denied reports he was preparing to fire Powell.
This seems to point to two possibilities:
Everything is a TACO trade now, and markets are convinced Trump will never cross the red line of tampering with the Fed’s independence.
The red line is more academic dogma than it is a law of finance.
Trouble is, there’s only one way to find out, and that involves crossing the red line that Trump has been inching ever closer to.
ICYMI: The president on Tuesday night told lawmakers in a meeting that he was going to fire Powell, possibly as soon as Wednesday, over a costly renovation at the Federal Reserve headquarters, according to a source briefed on the president’s remarks who spoke to my CNN colleagues.
Trump even gestured to a document he claimed was a termination letter for Powell, a person who was in the room told CNN.
Then, on Wednesday, Trump said publicly that firing Powell was “highly unlikely … unless he has to leave for fraud.” (Coincidentally, Trump’s OMB head has accused Powell of lying to Congress about the renovation, which Trump on Tuesday said he believes is a fireable offense.)
Put simply: The US has never been this close to seeing what happens when the president moves to unseat the Fed chair. Everyone on Wall Street and across Corporate America should be freaking out.
Just this past Friday, George Saravelos, global head of FX strategy at Deutsche Bank, wrote that it is “stating the obvious” that investors would interpret Powell’s firing as a “direct affront to Fed independence,” which is widely seen as vital to managing inflation.
“The empirical and academic evidence on the impact of a loss of central bank independence is fairly clear,” Saravelos wrote. “In extreme cases, both the currency and the bond market can collapse as inflation expectations move higher, real yields drop and broader risk premia increase on the back of institutional erosion.”
Of course, nothing like *waves hands wildly* all of this has ever happened. And the empirical evidence may be showing that markets, like everything else, can become so conditioned to chaos that all the old rules no longer apply.
“Markets appear to be getting accustomed to a pattern, most notable in the area of tariffs, in which the Administration threatens fairly radical action, only to dial it back when the initial market reacts negatively,” Jonathan Doh, professor of management at Villanova School of Business, said in an email. “In each successive round, the responses have been increasingly muted.”
This is the much-buzzed-about TACO trade — the idea that “Trump always chickens out” — that has proven profitable this year. If there’s a Trump-related sell-off, investors buy the dip, wait for Trump to change his mind or scale back the offending policy, and then ride the rally. (Increasingly, though, investors are skipping the whole panic-selling part and just assuming nothing Trump says is real until some watered-down version of it has actually happened.)
To be clear, even though stock markets shrugged at reports of Powell’s imminent firing, the news did provoke some movement in the currency and bond markets. Wednesday morning, before Trump’s denial, gold, the classic safe haven, and long-term bond yields went up, while the dollar fell almost 1%.
Those reactions are pretty much what you’d expect, said Steve Sosnick, chief strategist at Interactive Brokers, though he noted that “in theory, the bond vigilantes should have reacted more vigorously,” to the news. (“Bond vigilantes” are investors who use their buying power to signal their disapproval of a policy — they were a big reason why Trump decided to pause some tariffs for 90 days back in April.)
But stocks’ relatively muted response, he said, could reflect some troubling dynamics on the Street.
First, traders may be signaling that they are more excited about the prospect of lower interest rates (the No. 1 thing Trump wants from the Fed) than they are worried about the central bank’s protection from the political fray.
Stock investors, he said, may be “so enamored with the idea of lower rates that they don’t care if they come as the result of governmental interference.”
Which is a pretty wild idea!
When I asked Sosnick if the Fed’s independence may not be as precious to the market as market participants have long claimed, he said:
“I will assert that central bank independence is critical, and I think that I’m not alone with that belief,” he added. “But maybe not.”
More worrisome, perhaps, is how the Trump administration perceives the market’s reaction.
“We have to wonder if the earlier report was a trial balloon designed to see how markets might react if Powell were indeed fired,” Sosnick said. “Quite frankly, the relatively muted reactions from stocks and the 10-year bond might have increased the president’s willingness to take action, since the initial reaction was hardly catastrophic.”
