\n An assault on the Fed\u2019s independence could cause a flight from American assets.\n <\/p>\n
\n The US dollar\u2019s strength and premier status could be jeopardized if investors lose the perception that the Fed is independent, according to Francesco Pesole, an FX strategist at ING.\n <\/p>\n
\n \u201cAn independent Fed is a key foundation of the dollar\u2019s reserve currency appeal,\u201d Pesole said. \u201cMarkets hold a currency as reserve when they have long-term expectations that inflation will be under control and the bond market will work smoothly. In the case of the dollar this is fundamentally guaranteed by the Fed being independent from politics.\u201d\n <\/p>\n
\n \u201cSo should markets interpret any changes at the helm of the Fed as a loss of that independence, the incentive to hold dollars will be diminished,\u201d Pesole said.\n <\/p>\n
\n The dollar in May hit a three-year low after Trump levied a flurry of criticisms against Powell.\n <\/p>\n
\n Bond markets could also be rocked by an erosion of Fed independence.\n <\/p>\n
\n The 30-year Treasury yield on Tuesday rose above 5% for the first time since June. A sustained, continued rise in yields could send a signal that markets are pushing back on the Trump administration\u2019s attacks on Powell.\n <\/p>\n
\n Bond prices and yields trade in opposite direction. A rise in yields could signal investors are selling or refusing to buy US bonds and demanding higher rates to compensate for the perceived added risk of holding US debt.\n <\/p>\n
\n \u201cAt a minimum, we would expect a sustained and persistent risk premium to be subsequently embedded in both the US dollar and the Treasury market, with exceptionally high sensitivity to both the mix of data and the conduct of monetary policy in the subsequent months,\u201d Deutsche Bank\u2019s Saravelos said.\n <\/p>\n
\n Damage to the Fed\u2019s credibility could make inflation a more persistent issue. A Fed that is perceived to lower rates prematurely to meet political demands could ignite concerns about inflation and cause bond holders to demand higher yields.\n <\/p>\n
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\n Trump, who favors lower rates and has even proposed a rate cut of three points \u2014 which would be an unprecedented step and in itself a market-moving event \u2014 has long talked about removing Powell for not lowering borrowing costs quickly enough.\n <\/p>\n
\n But legal safeguards protect the Fed chair from an attempt by the president to fire him. Investors think members of Trump\u2019s own Cabinet would even advise against such a move.\n <\/p>\n
\n \u201cWe doubt that Trump will actually try to fire Powell on this basis with Bessent likely warning of the mayhem this would cause in markets, and serious doubts the Supreme Court would uphold the decision,\u201d Krishna Guha, vice chairman at Evercore ISI, said in a note.\n <\/p>\n
\n The Supreme Court thus far has signaled it would uphold the Fed chair\u2019s position other than a \u201cfor cause\u201d removal, \u201cwhich is interpreted in legal terms as narrowly related to misconduct,\u201d and not \u201cpolicy disagreements,\u201d according to Guha.\n <\/p>\n
\n The White House in recent days has been ramping up its criticisms of the Fed\u2019s ongoing construction project to renovate the central bank\u2019s headquarters in Washington, DC, effectively building a potential \u201cfor cause\u201d case for firing Powell.\n <\/p>\n
\n Senior Trump administration officials Director of the Office of Management and Budget Russell Vought and Director of the Federal Housing Finance Agency Bill Pulte have turned up the heat on criticizing the Fed\u2019s building renovation.\n <\/p>\n
\n A reporter on Tuesday asked Trump if Powell\u2019s handling of the renovation was a fireable offense. \u201cI think it sort of is,\u201d Trump said.\n <\/p>\n