On Wednesday at 11:15 AM ET, stock investors began to react sharply when Bloomberg reported that President Trump might soon fire Federal Reserve Chair Jerome Powell. This revelation triggered a nearly 1% decline in the stock market, serving as a warning signal for equity investors regarding the potential repercussions of Powell's dismissal.
Joe Brusuelas, the chief economist at RSM US, emphasized that the consequences of firing the central bank chief could be significantly detrimental. In an insightful note to Axios, Brusuelas stated, "It will be several orders of magnitude worse should the White House ever truly move to fire Powell." The potential ousting of Powell could prompt a broader shift in investment strategies, particularly a move away from dollar-denominated assets.
It's important to note that stocks are fundamentally dollar-denominated assets. While the stock market experienced a recovery from its initial losses on Wednesday, the value of the dollar did not follow suit. This disconnection may suggest that investors are momentarily comfortable with the risk/reward profile of equities, but are progressively distancing themselves from the dollar.
Over time, this gradual shift could exert downward pressure on equity markets. The swift rebound in the market reflects a growing sentiment among investors. Conversations with various sources indicate that Wall Street's perception of a potential Powell ousting is evolving.
Mohamed El-Erian, president of Queens' College and former CEO of Pimco, raised critical questions regarding Powell's position. He suggested that Powell might be exposing the central bank to risks by remaining in his role within a potentially hostile administration. This sentiment could lead to a change in market narratives, transitioning from the current TACO trade to what some might refer to as the "Trump-is-right" trade.
As we continue to monitor market sentiment and investor reactions, the resilience of the markets in the face of a potential Fed chair ousting could redefine strategies going forward. Investors and analysts alike will be watching closely to see how these developments unfold and what they mean for the future of the U.S. economy.
