Political Storm and Monetary Trade-offs: Fed Chair Powell Faces Multiple Challenges

Powell, as the chairman of the Fed, is in the most challenging moment of his career. On one hand, he needs to formulate appropriate monetary policy in a complex economic environment; on the other hand, he also has to deal with immense pressure from the political sphere. This seemingly bizarre political game is pushing global market sentiment to a critical point.

Seven Years of Grievances: From Appointment to Opposition

The conflict between Powell and a certain political figure is essentially a divergence in monetary policy stance. One advocates for interest rate cuts to stimulate the economy, while the other insists on a prudent policy. This divergence has persisted since 2018.

Interestingly, Powell was initially nominated for the position of Fed chair by this politician. At that time, he hoped Powell would implement a loose monetary policy to promote economic growth. However, as time went on, the differences between the two deepened.

In October 2018, this political figure publicly criticized Powell for the first time, claiming that the Fed's rapid interest rate hikes were the "biggest threat." Since then, he has repeatedly pressured Powell, and their war of words has continued unabated.

Recently, the situation has further escalated. In an election year, this politician has repeatedly called for Powell's resignation, accusing him of "acting too slowly and not cutting interest rates effectively." However, under U.S. law, the president does not have the authority to remove the Fed chairman due to policy differences unless there is clear evidence of wrongdoing or serious misconduct.

In July of this year, the situation took a turn. This political figure's team suddenly brought forward new accusations: demanding Congress investigate Powell, claiming there are major violations suspected in the renovation project of the Fed headquarters. Meanwhile, rumors are circulating that Powell is "considering resignation," causing the situation to escalate rapidly.

The Dilemma of Monetary Policy

Currently, Powell is facing a dilemma in monetary policy: on one hand, there are policies that may bring upward pressure on prices, and on the other hand, there are signs of cooling in the labor market. This dual pressure presents a significant challenge for the Fed's decision-making.

If the Fed lowers interest rates too early, it may lead to uncontrolled inflation expectations; if it chooses to raise interest rates to stabilize inflation, it may trigger turmoil in the bond market, soaring interest rates, and even trigger a financial crisis.

In the face of these challenges and political pressure, Powell chose to confront them. He requested to continue reviewing the headquarters renovation project and responded in detail through official channels to the reasons for the rising costs, refuting the accusations of "luxurious renovation."

Potential Market Impact of Employee Turnover

If Powell really resigns, the global financial markets may face a huge shock. Some analysts believe this could lead to a significant drop in the dollar index in the short term, with notable sell-offs in the fixed income market. The dollar and bonds may face persistent risk premiums, and investors might also worry about the politicization of the Fed's currency swap agreements with other central banks.

What is more concerning is that, given the current fragile external financing situation of the US economy, the market may experience more severe and destructive fluctuations than expected.

Experts have pointed out that although the likelihood of Powell resigning early is low, if it happens, it could lead to a steepening of the U.S. Treasury yield curve, as investors would expect falling interest rates, accelerating inflation, and a weakening of the Fed's independence. In this scenario, the dollar may face devaluation pressure.

From the perspective of risk assets, even if the Fed chair is replaced, the new chair may still have to return to tightening policies under inflationary pressures. If the Fed starts to cut interest rates in a stable economy with low unemployment, it could boost risk assets, including the crypto market, in the short term. However, considering the current interest rate levels, there is still a significant amount of monetary policy space that needs to be released in the future.

Powell's tenure is not only related to monetary policy but also an important test of the Fed's independence. Regardless of the outcome, this game will have far-reaching effects on the global financial market.