Last week’s TFTD “Trump twists, Powell sticks”, we noted that “even in the contest between Fed Chair and POTUS, the issue is not certain,” and that “it’s not much fun being a lame duck”. It seems that financial journalists have finally caught up with the story, attributing the recent dollar weakness to Trump’s threat to turn Powell into a lame duck. Consider us skeptical. Dec SOFR contracts have perked up by about 30bps from recent lows, but does that really explain the most recent bout of dollar weakness? The last time DXY traded down here (97.325) was Feb 25th 2022.
Still, we can all see the direction of travel, and there are plenty of other reasons to be bearish the dollar, so maybe this was just the final straw. Either way, whoever placed this “exclusive” with the WSJ didn’t feel the need for subtlety. Warsh, Hassett and Bessent were all suggested as possible Powell replacements. Oddly, given his and Michelle Bowman’s efforts to push the FOMC towards earlier cuts, we had to wait till the third paragraph before Chris Waller’s name came up, which suggests he wasn’t the WSJ’s source. As CNN noted, ‘while Bowman and Waller are both Trump appointees, the Fed is an independent institution that doesn’t consider politics in its decisions”. No, of course not. Heaven forbid.
[Note the Green Line!]
Powell was having none of it and mounted a “robust defense” of delaying further rate normalization in his testimony to the House Financial Services Committee. Naturally, he suggested that the delay to further rate cuts was driven by concerns about the potential inflationary effects of tariffs, and were it not for the tariffs, the Fed would probably have continued cutting rates (it’s your own fault, Donald). Still, the Republican members of the Financial Services Committee were not mollified. Vance offered a wonderfully succinct exposition of their position.
Those of us from the UK couldn’t help but be reminded of Henry VIII’s beef with Thomas Becket, another uncooperative high priest who got in the way of the King’s preferred policy. We doubt Powell will pay as high a price as Becket, but then we also doubt he will subsequently be beatified. Still, you never know. Is the new Pope a Democrat?
P.S. Brad Setser often puts out very interesting commentaries. We thought his “Ten Key Takeaways From Treasury’s Foreign Exchange Report” was definitely worth a read.
