GM. This is Milk Road Macro, the only thing moving faster than markets on Powell rumors.
Here’s what we got for you today:
- ✍️ The Trump/Powell showdown is heating up
- 📊 Should Trump fire Powell?
- 🍪 Trump’s new spending bill adds $3.4T to deficits over 10 years
Prices as of 8:00 AM ET.
THE TRUMP/POWELL SHOWDOWN IS HEATING UP
President Trump is adamant that interest rates must be slashed.
Fed chair Jerome Powell is standing firm - so Trump wants him gone.
We covered this Trump/Powell showdown last week - but things have kicked up a notch since then.
Trump firing Powell would be a big event for global markets.
It would be a direct attack on Federal Reserve independence - and a signal of a more dovish Fed chair incoming.
And last week we saw a weird “trial run” of what might happen to markets in the event of a Powell firing.
So what in the world happened last week?
Can Trump actually fire Powell legally?
And what are the risks and opportunities in markets?
Let’s take a look…
So, what in the world happened last week?
Markets suddenly lurched all over the place last Wednesday.
This was because reports emerged that Trump had allegedly asked lawmakers whether he should fire Powell, and reportedly waved a “draft letter” around.
It was reported that Trump was “likely” to fire Powell “soon”.
But then, less than an hour later, Trump told reporters it was “highly unlikely” he would fire Powell - and everything calmed down.
My view is that the initial leak was a test to see how the market would react.
We saw a similar situation back in early April when the walking back of Liberation Day tariffs was “leaked” a couple of days before it actually happened.
So what can we learn from how markets reacted in the minutes between the initial reports and Trump’s follow-up comments?
The dollar nosedived.
Long-term Treasury yields rose, while short-term Treasury yields fell.
This indicates a market expecting a higher probability of rate cuts (short-term yields falling), but higher growth and/or higher inflation concerns (long-term yields rising).
The stock market plunged.
Gold surged, in a “flight-to-safety” style trade.
Interestingly, bitcoin whipsawed around but largely remained flat.
Almost like it wasn’t sure whether it should be in the “gold bucket” or the “stocks bucket”.
This was definitely a bad market reaction for the Trump administration - which is probably why the initial report was walked back so quickly.
The most concerning aspect for the Trump team would be that long-end Treasury yields rose.
This is likely an indication that the bond market thinks the economy is humming along just fine and more potentially unwarranted rate cuts might lead to a reacceleration in inflation.
This is the bond market saying it doesn’t think the prospect of more rate cuts is a good idea.
10-year inflation breakevens - representing the market's expectation of average inflation over the next 10 years - are currently hovering at two-year highs.
But, can Trump actually fire Powell legally?
Some people have argued that Trump can’t fire Powell.
Trump can fire Powell - if the administration can find a reason to dismiss the Fed Chair “for cause”, according to an untested clause in the Federal Reserve Act of 1913.
And attacks against Powell have continued to mount in recent days relating to a $2.5bn renovation of the Fed’s famous Eccles Building, which includes “VIP elevators” and marble floors.
White House economic advisor Kevin Hassett said: “The bottom line is that this is the most expensive project in DC history and so the Fed has a lot to answer for”.
Russ Vought, head of the Office of Management and Budget, called the refurbishment “an outrageous cost overrun”, saying Trump was “offended”.
And then, on Monday this week, it was revealed that Powell had been referred to the DOJ for criminal charges for perjury related to the controversial renovation.
He’s accused of lying under oath about the project.
Powell has called the claims "inaccurate" and said many of the features laid out in the original plans had been scrapped.
Things are clearly heating up - but this “for cause” avenue towards firing Powell would likely be met with messy legal challenges.
It’s also possible that the Trump administration could demote Powell, instead of firing him outright.
They could shift Powell back to a Governor, and promote an existing Governor to Chair.
Michael Feroli, an analyst at JP Morgan, noted: “The administration would surely hope that a demoted Powell would follow other ex-Chairs and leave the Fed entirely".
Despite all the noise, I still think it’s unlikely that Trump will fire Powell.
And Polymarket agrees, with odds currently sitting at 23%, at the time of writing.
So, what are the risks/opportunities?
I think the risks of a Powell firing have now elevated to a level where they need to be taken seriously.
Mark Dowding, chief investment officer of the BlueBay Fixed Income unit at RBC Global Asset Management, said:
“We have assumed there is no basis for firing a Fed chair and the Fed is immune from political interference. There is a clear sense that this is now changing.”
According to a Goldman Sachs note to clients:
“Lower front end rates and a weaker currency as the market questions the Fed’s independence or credibility can prove a toxic mix for the inflation profile. This is consistent with the work done a couple of months ago which showed that an unscheduled change in central bank leadership is associated with a 1% increase in inflation from more dovish policy.”
It seems very likely that a potential Powell dismissal will result in a considerably weaker dollar and considerably higher long-end Treasury yields.
But it could also result in strong positive momentum for debasement trades, like gold and bitcoin.
FRNT Financial points out:
“For BTC proponents, the Trump-Powell tension is a validation of one of the asset’s core features: the immutability and predictability of its inflation schedule. Regardless of short-term political interests, BTC’s prior defined characteristics cannot be altered by any one government. The ability of BTC to provide insulation against any government’s decisions and interest are contributing to the asset’s growing perception as a safe haven.”
Wrapping up
The Trump/Powell saga is getting heated.
The Trump administration appears to be refining its plan-of-attack and concentrating on the controversial renovation of the Eccles building.
While the prospect of Powell being fired is probably still unlikely, the risk is growing.
A Powell dismissal would almost certainly be bad news for the dollar and long-term Treasuries.
But it could be good news for debasement hedge assets like gold and bitcoin.
That’s it for this edition - catch you for the next one.
POLL OF THE WEEK 📊
Last week, we asked you:
Since early April, there have been clear market signs that capital is “shifting out across the risk curve” - but how have you managed your investments?
More than half of respondents said they hadn’t made any changes to their allocation.
But more than 40% of respondents said they had added to speculative investments.
A small number said they had de-risked.
This week, we are asking you:
Should Trump fire Powell?
BITE-SIZED COOKIES FOR THE ROAD 🍪
Trump’s new tax and spending bill will add $3.4 trillion to US deficits over a decade, according to the Congressional Budget Office. A CBO report predicts a $4.5 trillion decrease in revenues and a $1.1 trillion decline in spending through 2034, relative to a current-law baseline.
AstraZeneca said it is investing $50 billion in US manufacturing by 2030. This follows the lead of big pharma peers that have announced more than $200 billion combined in investments in the coming years.
Hackers exploited a security flaw in Microsoft software to breach governments and businesses and steal information, according to researchers. Microsoft over the weekend released a patch for the vulnerability in servers of the SharePoint document management software.
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