Trump could cause market turmoil if removing Powell as central bank chief

U.S. President Donald Trump risks hurting investor sentiment if he removes Jerome Powell as chair of the Federal Reserve, according to a former American central bank governor.

Investors have in recent months become increasingly nervous as trade tensions between the U.S. and China rise. Conflict between the two major powers have threatened to derail economic growth even further at a time when the global economy has shown signs of slowing down.

“To fire a Federal Reserve governor or chairman would be a very unprecedented move, it would result in turmoil in the financial markets, it would be something that you really don’t want to do because you don’t need an absolute increase in uncertainty which this would bring about,” Robert Heller, a member of the Fed’s Board of Governors from 1986 to 1989, told CNBC’s “Street Signs” on Thursday.

Heller’s comment came as Bloomberg, citing people familiar with the matter, reported on Wednesday that Trump said he believes he has the authority to demote Powell.

The president had publicly blamed the Fed’s interest rates hikes for holding back U.S. economic growth. He considered demoting Powell in February, Bloomberg reported on Tuesday. After the Fed announced its monetary policy decision on Wednesday, Powell said he intends to serve his full four-year term.

“The law is clear that I have a four-year term,” the central bank chief emphasized.

Not a done deal

The Fed on Wednesday announced its decision to keep rates unchanged. But Powell said some officials believe the case has strengthened for the central bank to ease policy — a statement that many investors interpreted as an indication of a rate cut in July.

“I think it’s all but locked in, probably a 95% chance that they do cut at the July meeting,” David Lafferty, chief market strategist at Natixis Investment Managers, told CNBC’s “Squawk Box.”

But some experts such as Dennis Lockhart, former president of the Federal Reserve Bank of Atlanta, said it’s not a “foregone conclusion” that the Fed will ease policy next month.

He explained that while economic data in the U.S. has been “somewhat mixed,” there aren’t many data releases between now and the next Fed meeting on July 30-31 that would allow central bankers to set monetary policy differently than they did this month.

Still, Lockhart told CNBC’s “Squawk Box” that the Fed will be mindful of how sentiment is swayed by any trade developments as that has an impact on investment decisions of businesses and inflation — two indicators that the central bank watches closely.

Source: CNBC