US President Donald Trump is increasing the pressure on Fed Chairman Jerome Powell. This week, a draft letter surfaced in Washington advocating his resignation, allegedly due to cost overruns in the renovation of the central bank's headquarters, derisively referred to by Trump-friendly sources as "Powell's Palace." "Although the White House withdrew the letter, the message is clear: Trump wants to pressure Powell in an attempt to force rate cuts," says Mark Dowding, CIO at asset manager RBC BlueBay Asset Management.
Financial markets are reacting nervously. Short-term US Treasury yields fell while long-term interest rates rose, a classic signal that investors fear political interference. "The idea that Trump will soon appoint a new Fed chairman who does what the White House wants is already priced into the curve," says Dowding. Investors are questioning the central bank's independence and the credibility of its inflation mandate. This is leading to higher term premiums and a steeper yield curve.
Dowding doesn't expect a rate cut at this month's interest rate decision but counts on an initial 25 basis point cut in September, assuming there's more clarity on inflation and trade tariff policy by then. "The market has long since stopped looking solely at macro data," he says. "If Powell is replaced, which isn't a foregone conclusion but certainly not unthinkable, that could signal a weaker dollar and increased volatility. August 1st could be a turning point in that regard."
