Fed's Poisoned Chalice

How to Return to 1970s-Style Monetary Dysfunction

President Donald Trump’s efforts to remove Federal Reserve Chairman Jerome Powell before the end of his term in May 2026 continue to cast a long shadow over global financial markets. Although the President said this week that it was “highly unlikely” that Powell would be ousted early, he quickly added a caveat: “unless he has to leave for fraud.” That reference, repeated in recent days by the President and his officials, alludes to substantial cost overruns in the construction of the Federal Reserve’s Washington, DC headquarters — a project managed by the central bank, but with no evidence of criminal wrongdoing or misappropriation of funds.

This appears to be the administration’s legal strategy: to frame the cost overruns as “cause” for dismissal, the only condition under which the President may legally remove a Fed Chair according to a recent Supreme Court view. Behind closed doors, the President reportedly told Republican lawmakers at the White House on Tuesday that he was considering firing Powell and told journalists the next day that he received “substantial support” for doing so.

Market reaction was swift. Long-dated Treasury yields surged Wednesday morning, and the dollar dropped nearly 2% in minutes — a flash response to what investors interpreted as a serious threat to the Fed as an institution. The White House tried to tamp down the reaction with yet another denial that Powell’s firing was imminent. But the damage was already done.

While equity markets have remained relatively calm — buoyed by a focus on corporate earnings — more policy-sensitive instruments have not. The dollar, gold, and long-dated Treasury yields have shown increasing signs of stress, not because a Powell dismissal is certain, but because the President’s repeated statements are now being priced in as credible scenarios. Markets can absorb political volatility; what they fear more is institutional erosion.

Now imagine that Trump finally acts — announcing Powell’s removal and nominating a successor. The three most frequently mentioned names are:

• Kevin Hassett, Director of the National Economic Council

• Kevin Warsh, a former Fed Governor, and

• Scott Bessent, the current Treasury Secretary

Each has publicly supported lower interest rates right away. Installing any of the three would signal an immediate shift in the Fed’s trajectory — away from inflation vigilance and toward political accommodation. It would also signify a subordination of the Federal Reserve to the presidency.

The firing would also have immediate consequences in the Treasury and currency markets. The 10-year Treasury yield, already drifting higher, would likely surge past 4.75%, reaching my year-end target of 5% far ahead of schedule. Foreign holders of Treasurys — led by Japan, the United Kingdom, and China, which collectively held $2.7 trillion as of May — could choose to reduce holdings to avoid further losses. A coordinated retreat by the top creditors would add further pressure at the long end of the curve.

Meanwhile, the DXY dollar index, which stood at 104 on Liberation Day (April 2) and has since dropped to 98.5 — a more than 5% decline — could plunge to 93 or lower in the wake of Powell’s ouster. That would reflect not just market disapproval but a fundamental loss of confidence in the U.S. monetary regime. A weakening dollar and rising long-term yields would together boost the cost of servicing U.S. debt, precisely at a time when the Big Beautiful Bill has increased future deficits.

Trump may view a loyal Fed Chair as the key to slashing rates and juicing growth ahead of the 2026 mid-term elections. But with debt costs rising and foreign demand for Treasurys weakening, the market may push in the opposite direction. The result: higher bond yields, not lower — and a deepening crisis of credibility.

This raises an uncomfortable question: Would Hassett, Warsh, or Bessent even want the job under these circumstances? Taking the helm of the Fed under these conditions would be accepting a poisoned chalice — a role stripped of independence, weighed down by political expectation, and followed closely by skeptical markets. Any immediate rate cuts under the new leadership would be seen not as sound macroeconomic policy but as political obedience. The Fed’s institutional credibility, painstakingly built over decades, would be shattered.

We’ve seen this movie before. During my graduate student years, I studied the uneasy alliance between President Richard Nixon and Fed Chairman Arthur Burns, who engineered easy money to win re-election — only to unleash the stagflation of the 1970s. It took Paul Volcker’s painful tightening in the early 1980s to restore discipline. Trump’s current trajectory, if unchecked, could take us back to that dismal era: politicized monetary policy, high inflation, and an exhausted bond market.

The President may win the fight to replace Powell. But the cost will not be borne by the central bank alone. It will be borne by every American in the form of a weaker dollar, higher mortgage rates, and the loss of the Fed as a bulwark of financial stability.

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

www.srikumarglobal.com

@SriKGlobal

July 19, 2025

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

This publication is for information purposes only. Past performance is no guarantee of future results. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice. Sri-Kumar Global Strategies, Inc. assumes no duty to update any such statements. Any holdings of a particular company or security discussed herein are under periodic review by the author and are subject to change at any time, without notice. This report may include estimates, projections and other "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. This publication is not to be used or considered as an offer to sell, or a solicitation to an offer to buy, any security. Nothing contained herein should be considered a recommendation or advice to purchase or sell any security. Sri-Kumar Global Strategies, Inc., or its employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time without notice. ©Copyright 2025 -- Sri-Kumar Global Strategies, Inc., 312 Arizona Avenue, Santa Monica, CA 90401; Telephone +1-310-455-6071