Did Trump really think he could get what he wanted by attacking Powell? Analysis: The market may "return the favor" to him

Will former President Trump attempt to remove Federal Reserve Chairman Jerome Powell? This has become one of the most concerning topics in the financial world. An analysis by Bloomberg suggests that even if Trump were to fire Powell, he would gain no benefits, as the market would teach him a lesson.The article states that Trump clearly wants Powell to leave, and the sooner the better. However, it is still unclear whether Trump will actually take action (regardless of legal support). According to previous media reports, some of Trump's advisors have convinced him that firing Powell would lead to greater market turmoil, so he currently does not plan to do so.Severe fluctuations in the financial market can have real costs for the real economy. Suppose Trump really did remove Powell and replaced him with a yes-man who immediately cut interest rates significantly. What would he actually gain?Short-term Benefits of Rate CutsOn April 2nd, according to CCTV News, the White House issued a statement saying that Trump would impose a 10% "baseline tariff" on all countries, leading to a significant pullback in the U.S. stock market, while long-term U.S. Treasury yields actually rose.The article analyzes that the 10-year U.S. Treasury yield essentially reflects the market's expectations of how the Federal Reserve will set short-term interest rates over the next 10 years to maintain an inflation rate of 2%. The Fed's policy rate only controls short-term borrowing costs, while the long-term rate is composed of a series of "short-term" rates. Therefore, the current market expectation is that the average interest rate level set by the Fed over the next 10 years will be higher than the expectations on April 2nd.Many private sector borrowing costs are benchmarked against a certain part of the U.S. yield curve. For example, in terms of mortgages, the average American interacts with interest rates most commonly through home loans. Mortgages are typically anchored to the 10-year Treasury yield (plus a spread), and this yield has also been rising since April 2nd.The key point is that even if the Fed aggressively cuts rates now, it does not mean that interest rates in the real economy will immediately decline. Therefore, rate cuts have no short-term benefits.Of course, the Fed, with its unlimited ammunition, does have the tools to "force down all interest rates," commonly known as "Yield Curve Control." The Fed can use its unlimited balance sheet to purchase all Treasury securities with yields above 3%, thereby pushing rates down.But the problem is that the market currently believes that to fulfill the 2% inflation promise, a 3% rate is far from sufficient; it may require an average of 4.38%. So if the Fed were to do this, the market would interpret it as the "Fed abandoning its inflation target," leading to a significant depreciation of the dollar.The logic behind this is very simple. The current promise of the Federal Reserve is: if you hold US dollars, you can spend only 2% more each year to purchase a basket of goods. Although some people think that 2% is too high, this is the "content of the deal." If the market begins to believe that the Federal Reserve implicitly expects the prices of the goods in the basket to rise more than 2%, then the dollar will depreciate significantly.The Credibility of the Federal Reserve Will Be UnderminedScholars Bruno Höfig, Iderley Colombini, and Leonardo Paes Müller have written that the historical shift in US monetary policy can be summarized as: from "gold standard" to "price index standard," meaning that in the past, dollars could be exchanged for gold, but now they can be exchanged for a basket of goods and services measured by indices like CPI or PCE.The article states that although there was a severe inflation crisis in 2022, leading to a significant depreciation of the dollar against a basket of goods, it appreciated against other currencies. This indicates that the market believes the Federal Reserve is merely experiencing a "glitch" or "going in the wrong direction," rather than fundamentally defaulting on its commitments. After all, central banks around the world made the same mistake at that time. The Federal Reserve is also very transparent; you can basically know what they are thinking at any time.However, if the Federal Reserve now arbitrarily lowers interest rates due to presidential pressure and allows inflation to rise again, that would not be a glitch, but a blatant breach of trust. This is because what the dollar can buy is based on trust, institutions, and rules. There is no law stating that "the dollar can depreciate by a maximum of 2% per year," but people believe in the dollar because they trust the seriousness and independence of the Federal Reserve. If the Federal Reserve is beholden to the president, this trust will be undermined.The article argues that the main theme of the Trump 2.0 administration is a strong challenge to institutions and norms. In the issue of expelling illegal immigrants, such actions may be effective in the short term, as he indeed achieved his policy goals. However, regarding the Federal Reserve, even short-term benefits are not obvious.Of course, there is one area that may really benefit: agriculture. Theoretically, a depreciated dollar would promote exports. But in reality, not every product can immediately become more competitive as a result. For example, American cars may not sell better because of this, and Boeing planes will not necessarily be produced in greater numbers. However, after the dollar depreciates, the US may indeed be able to export more soybeans and wheat