How Trump's aggression towards Powell is backfiring

Donald Trumpés latest attack on Jerome Powell has not gone unnoticed, including within his own ranks. The U.S. president is risking alienating Republican senators - the very lawmakers who will have to confirm his pick to lead the Fed.

Venezuela, Iran, Greenland… Donald Trump is everywhere on the world stage at the start of this year. However, he has not forgotten Jerome Powell: a criminal investigation has been opened into the Fed chair over the renovation of the Fed's headquarters and possible perjury by Jerome Powell during his testimony before Congress last June.

As we explained yesterday, the Trump administrationés goal is above all to push Jerome Powell to resign at the end of his term as chair. Because he remains a governor until January 2028, and while the custom for a Fed chair at the end of a term is to resign, he can absolutely choose to stay on its board for the next two years.

Until now, Powell had always refused to clarify his future, although observers were expecting him to leave the Fed after May. The video published on  Sunday evening completely changed those forecasts. "The probability that Powell leaves his post as chair has become close to zero,” says David Wilcox, an economist at the Peterson Institute who worked at the Fed between 2011 and 2018. "He now sees the severity of the threat hanging over the institution and probably feels he has no choice but to stay.”

Indeed, since his appointment in 2018, Jerome Powell has always avoided political combat. Faced with Donald Trump's attacks (which he was already subjected to during Trump's first term in power), he has so far always chosen to remain above the fray. His Sunday evening video marks a real change in stance: he is now stepping into the arena and responding directly to the president.

Boomerang effect

We will let Jerome Powell clarify his own future, although the conclusion that MarketScreener draws from this sequence is that you do not make this kind of video and then resign. Donald Trump's aggressiveness toward Jerome Powell therefore risks producing the opposite of the intended result... And more broadly, his push to reassert control over the Fed is ultimately counterproductive.

For example, the Trump administration has sought greater control over the appointment of regional Fed presidents - like governors, who are directly appointed by the president. But that pressure instead seems to have prompted the Fed to accelerate its timetable. In mid-December, the seven governors unanimously approved five-year renewals for all regional Fed presidents (with the exception of Raphael Bostic, who is retiring).

Next, his own camp is not very comfortable with the attacks on the Fed. According to Axios, Scott Bessent reportedly told Donald Trump on Sunday evening that the federal investigation targeting Powell "has sown chaos” and could have harmful consequences for the markets.

Some Republican officials have even publicly voiced their opposition. Senator Thom Tillis, a member of the Senate Banking Committee, said he would oppose any Fed nomination "until this legal issue is fully resolved.” A stance backed by his Alaska colleague Lisa Murkowski, who said that "if the Federal Reserve loses its independence, the stability of our markets and the economy in general will suffer.” Remember that Fed governors are appointed by the US president, but must then be confirmed by the Senate, with the Republican majority fairly narrow.

A more independent Fed?

Finally, while market reactions have been very muted at the start of the week, the attacks on the Fed could ultimately translate into a higher risk premium on US debt and therefore higher long-term yields - i.e. the opposite of what the Trump administration wants. Remember that the Fed sets short-term rates, but long-term rates are the sum of expectations for growth, inflation (which can rise if a new Fed chair lets inflation run), and the term premium.

The upside to all this is that while many investors worry about the Fed's independence, Donald Trump's attacks could in fact strengthen it.

"Within the Federal Reserve, this development - the criminal investigation against Powell - will be seen as very alarming and as proof that Trump intends to take control of monetary policy,” says former Fed chair Janet Yellen. "Those who fear for the Fed's independence may be more inclined to stay, to limit the number of seats available for Trump to control the board.”