Image: Federal Reserve, public domain.
The attacks on Federal Reserve Chair Jerome Powell are intensifying.
We should be in a period of recovery for a brow-beaten U.S. Dollar, what with tariff headlines losing their bite and U.S. stocks rallying to new record highs.
Not to mention that the odds of a Federal Reserve rate cut are receding.
But just as the runway clears and the Dollar lined itself up for takeoff, another problem strikes: a renewed push by U.S. President Donald Trump to ditch Powell.
"The attacks on the Fed are intensifying," says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman. "We believe confidence in US policymaking will continue to erode."
Analysts are watching an opportunistic move by Trump to remove the Chair over the matter of renovations to two Fed buildings in Washington.
The buildings are undergoing a $2.5BN rennovation that Trump and his allies allege has been mishandled.
Trump has stated he wouldn't fire Powell before the expiry of his term, but political analysts say investigating the renovation could give Trump ammunition to remove an obstacle to his economic agenda.
"Powell ouster would be rocket fuel for USD bears," says Robert Howard, a market analyst at Reuters.
Above: The Dollar index, a measure of USD performance, should be due a rebound. Headlines over Fed independence won't be helping.
"The U.S. dollar could plunge in value if the White House is successful in its attempt to force Jerome Powell out from his job as Federal Reserve chair before the scheduled end of his term in May 2026. An early Powell exit would cast major doubt over the U.S. central bank's independence and could tee up a hefty reduction in the Fed's policy rate, which U.S. President Donald Trump on Monday said should be at 1% or lower," he adds.
In response to growing pressure, Powell asked the U.S. central bank's inspector general Michael Horowitz to review the costs involved in the renovation.
"Administration officials are openly criticising Powell for the renovation of the Fed's headquarters in DC. Some are speculating that these officials are building a case for firing Powell 'for cause' but we are hard-pressed to justify such a drastic move," says Win.
The officials and congressional allies accuse the Fed of building an excessively luxurious campus at its longtime headquarters building and another historic building next door.
It bears remembering that the plans were approved by the Inspector General in 2021, with the Fed saying the buildings are in dire need of work, having not received a major upgrade since their completion in the 1930s.
Above: The Fed published pictures showing work being conducted in the interior of its main headquarters. Source.
However, in recent days, Trump has installed loyalists to the National Capital Planning Commission, which has authority over federal building design issues.
A top White House official has suggested the Fed made changes to the building contrary to the law governing the NCPC.
A recent Supreme Court decision that specifically noted protections for Powell should have ended any debate on the security of Powell's position.
"Any attempts to remove him now would not be taken well by the markets, to state the obvious," says Win.
The Dollar has shown sensitivity to the matter of Federal Reserve independence for two reasons:
1) A financial asset is only as strong as the credility of the institutions behind it. Gouging out Fed independence would inject notable risk premia into U.S. bonds and the Dollar.
2) It is obvious the White House wants a Fed Chair who will preside over lower interest rates. The old fashioned playbook says lower rates = a lower Dollar.
"At some point, markets will react to what we see as an ongoing erosion in US policy credibility. That would first be manifested in the dollar, as the FX market is typically the quickest to react. The risk is that a weaker dollar then starts to impact other US asset markets, as investors will start to demand a higher risk premium for what has usually been viewed as the riskless asset. Stay tuned," says Win.