The President has threatened to remove the Fed Chair several times.
Transcript:
CAROLINE WOODS: We’ve heard a lot of talk, a lot of chatter about the Fed’s independence being in jeopardy. And we have President Trump potentially meeting with Fed Chair Powell, or at least the Fed later today. The first president to do so in some 20 years. How concerned are you that Fed Chair Powell’s job is at jeopardy, but even more so that the independence of the Fed could be at risk here?
ERIC WINOGRAD: I’m not a legal expert. I can’t tell you. You know, it appears that the president cannot fire Chair Powell. But, you know, this administration has found ways to circumvent court decisions in the past. One never knows. Certainly, I think like most market participants, I would hope that is not the case because an independent Fed is so critically important. The pressure campaign isn’t helpful. But look, if the president were to remove Powell or as you say, let’s broaden it out and say, what if the Fed’s independence is called into question. I think that has the potential to be very disruptive, particularly in fixed income markets. And the reason is that historically, central banks that aren’t independent accommodate and tolerate higher inflation. Doing what is politically expedient usually means stimulating growth. And stimulating growth can be inappropriate depending on the circumstances of the economy. And so I would expect in that world that bond market investors would have to put additional investment inflation premium into bond markets, and that would likely push longer dated yields up. It’s sort of contrary to the administration’s objectives of lowering yields, right. I think that if they were able to remove Chair Powell or compromise the Fed’s independence, it might be counterproductive from their point of view. We talked about mortgage rates, right. Mortgage rates are indexed to longer dated bond yields. And if bond yields go up so too do mortgage rates. And if you reduce the Fed’s independence and inflation expectations go up. That’s exactly what happens.
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