“There is no cause to worry. The high tide of prosperity will continue.”
– Andrew Mellon, August 1929
The President of the United States once again demonstrated his ignorance of how US interest rate markets work and why the Federal Reserve’s influence on the bond market is somewhat limited as his policies will force a major effort to generate more bonds to finance the One Big Beautiful Bill and the deficits to infinity and beyond it will generate.
For example, on Friday July 11th Trump said the following:
“I think he’s doing a terrible job,” Trump said before departing the White House for a trip to flood-ravaged Texas. “I think we should be 3 points lower, interest rates. He’s costing our country a lot of money.”
“We should be No. 1, and we’re not, and that’s because of Jerome Powell,” Trump added.
This was from an article which highlights the full frontal assault being launched by the White House per an article in The Hill titled Trump trying to make Powell ‘as miserable as possible’: Haberman.
This is nothing new as Trump went on the same time of rants in his first term, but knowing that he’s going to be able to choose Powell’s replacement next year is only inspiring the President to fuel the fires and force an early resignation.
Unfortunately for markets on the “This Week” program on ABC this Sunday morning, National Economic Council Director Kevin Hassett said the following:
“I think that whether the president decides to push down that road or not is going to depend a lot on the answers that we get to the questions that [Office of Management and Budget Director] Russ Vought sent to the Fed,” Hassett said when asked if the cost overruns could be used as a pretext to fire Powell.
“Yes or no answer. Does the president, in your view, have the authority to fire the Fed chair?” Karl asked.
That’s a thing that’s being looked into,” Hassett said. “But certainly, if there’s cause, he does.”
The war is continuing in an attempt to browbeat the Fed Chair into cutting rates to unrealistic levels which have little consequence to markets or the economy as much as the shot against the confidence level impacts it wold leave with foreign bond investors of US Treasuries.
The Wall Street Journal highlighted the battle between the Fed and Trump in their story Sunday night, White House Seizes on Fed Renovations as Opening to Oust Powell.
This key excerpt is the crux of the matter:
Fed scholars called the latest developments a transparent attempt, at best, to open up a new pressure front on the central bank and, at worst, a dangerous step toward manufacturing a legal justification for Powell’s removal.
“We are in a high-stakes moment in the history of the Federal Reserve,” said Peter Conti-Brown, a Fed scholar at the University of Pennsylvania. “It seems clear to me that the Trump administration, using various mechanisms, [has] now cooked up a post-hoc explanation for Powell’s removal.”
But is this a big deal? Let’s take a quick surf through modern post Great Depression history to find out.
I. The Marriner Eccles Demotion
As these pages outlined in The Financial Pandemic of 2025, the demotion of Marriner Eccles as Federal Reserve Chairman to a Governor created an uncomfortable moment in American banking circles. But was a detrimental event which crippled US markets? Based on the initial reaction of the Dow Jones Industrial Average one might have said “yes” to that question.
President Truman wanted interest rates suppressed, inflation be damned by the way, and Eccles wanted to return to a normal pre-World War II central bank policy of focusing on monetary stability and containing inflation. The action however resulted in a surge in the Dow after just a few months despite the negative connotations of Truman’s action.
This post controversy reaction might well be what some of Trump’s economic advisors are counting on.
II. The President Johnson v. Bill Martin Confrontation
After the conflagration involved in the Eccles debacle, Truman realized that there had to be some degree of peace and cooperation with the Federal Reserve. In the 1951 Treasury-Fed Accord (from the Federal Reserve history pages) the following was agreed upon:
On March 4, 1951, the Treasury and the Fed issued a statement saying they had “reached full accord with respect to debt management and monetary policies to be pursued in furthering their common purpose and to assure the successful financing of the government’s requirements and, at the same time, to minimize monetization of the public debt” (William McChesney Martin, Jr., Collection 1951).
As the markets moved forward, the economy rebounded as the Korean War was ended, there seemed to be a modicum of peace between the Executive Branch and the Fed. That is until Federal Reserve Chairman William McChesney Martin had to deal with the ever arrogant and intransigent, President Lyndon Johnson.
In 1965 as the Vietnam War was beginning to pick up speed and LBJ had won the election on the promise of a New Deal type of attack on poverty and inequality with his Great Society program, President Johnson demanded the Federal Reserve end its concerns with inflation and cut interest rates even further. Sound familiar?
The confrontation was so severe that it culminated in a physical confrontation between the Chair and LBJ in 1965:
When it comes to intimidating the Federal Reserve, President Trump pales in comparison to President Lyndon Johnson. After the Federal Reserve increased interest rates in 1965, President Johnson summoned then-Fed Chairman William McChesney Martin to Johnson’s Texas ranch where Johnson shoved him against the wall.
-Former Congressman Ron Paul writing for the Mises Institute, July 31, 2018
Despite this threat, Chairman Martin raised the discount rate before relenting later. The result for the markets?
Instead of focusing on the equity markets which traded in a somewhat range bound area from 1965 to 1970, let us focus on the US 10 year bond’s reaction.
The disaster of this capitulation was reflected in Martin’s own words after he left office:
Testifying before Congress in 1969, Martin addressed the issue of consistency, suggesting he regretted the Fed’s decision to ease in 1967 in hopes of getting the tax hike. “[A] credibility gap has developed over our capacity and willingness to maintain restraint,” he said. “We have been unwilling to take any real risks.”
After Martin left office, President Nixon appointed “his man” the now infamous, fair or not, Arthur Burns as Federal Reserve Chairman.
III. Trump’s Demand for Easy Money
The conflict has come down to something quite simple. President Donald Trump believes because the other nation’s have low interest rates, the United States has also. It’s reached the point where his demands for a 1% Federal Funds Rate has triggered doubts about the viability of US Dollar denominated assets by overseas investors as such a move would be viewed in concert with the US Treasury as a de-facto 10% + devaluation of the dollar.
Worse, Trump’s demand for change via drama and by using chaos theory has generated a non-stop public display of who can promote easy money policies by the three candidates who want to replace Powell. Statements like former Fed Governor Kevin Warsh today are just among the many promoting their positions to take over for Jay.
Meanwhile, an article in Fortune Magazine (originally via Bloomberg) yesterday highlights the growing tensions:
Risk of Powell ouster is underpriced, Deutsche Bank strategist says
This is the key excerpt to pay attention to below.
If Trump were to force Powell out, the subsequent 24 hours would probably see a drop of at least 3% to 4% in the trade-weighted dollar, as well as a 30 to 40 basis point fixed-income selloff, Saravelos said. The greenback and bonds would carry a “persistent” risk premium, he said, adding that investors may also grow anxious about the potential politicization of the Fed’s swap lines with other central banks.
“Investors would likely interpret such an event as a direct affront to Fed independence, putting the central bank under extreme institutional duress,” Saravelos said. “With the Fed sitting at the pinnacle of the global dollar monetary system, it is also stating the obvious that the consequences would reverberate far beyond US borders.”
The difference between the episodes of the President versus the Federal Reserve in 1948, 1965, and 1970 is that the United States was not solely based on a fiat currency as the gold standard was still in use.
The worst part about this fiat system in 2025 versus the 1970’s is the sole dependency on credit for funding monetary and economic expansion versus savings and actual investment. As demonstrated by the series of tax cuts and “incentives” provided from Trump v1.0 is that instead of piling money into manufacturing reshoring plus R&D, the major corporations including the tech giants, put their emphasis on stock buybacks to continue to fuel the bubble.
The US is at great risk of triggering a massive risk of losing confidence in not only the dollar, but worse our sovereign credit markets which would lead to a parallel risk to private credit by overseas investors reducing their risk in US markets.
So will Trump crash the markets if he demotes or worse, fires Jay Powell?
I still rate this as a greater than 60% risk at this point in time and the consequences will be so severe, if it happens, that it could be the ultimate finale in the great bull market in addition to being overbought and over-speculated at this moment. This is the type of black swan event that has not been anticipated nor hedged for that would have gravely unforeseen consequences perhaps damaging confidence not just on Wall Street, but on an already beaten down Main Street.
It is almost as if President Trump forgot the spanking he received from the bond market in April after Liberation Day.
(title pic courtesy of @grok via X)
