Former Federal Reserve Chair Willian McChesney Martin famously said the central bank’s role was to “take away the punch bowl just as the party gets going” – in other words, to tighten policy just as stocks start to boom and the economy risks overheating.
For central banks to serve as this counterbalance, they must be free to conduct monetary policy without political interference. The Great Moderation of inflation was driven by a global trend toward central bank independence and globalization.
Monetary policy is a relatively blunt tool. It can be used to control medium-term inflation, but the effectiveness and cost of policy adjustments depend on the level of public trust in the central bank. Building that trust takes years and hinges on its continued credibility. Losing that trust can happen overnight.
US National Economic Council Director Kevin Hassett said President Trump was investigating whether he could fire Federal Reserve Chair Powell. Investors appeared unsettled by the prospect of a politicized Fed, with both the US dollar and long-dated government bonds weakening in response.
Powell’s term as Federal Reserve Board Chair ends on May 15, 2026, while his term as a Board member runs until January 31, 2028.
Can the President fire Powell?
Fire Powell from which position? He holds three roles: he’s a member of the Board of Governors (appointed by the President and confirmed by the Senate), Chair of the Board of Governors (separately appointed by the President and confirmed by the Senate), and Chair of the Federal Open Market Committee (FOMC), elected by the committee members.
Policy disagreements are likely not sufficient grounds to have him removed. If the Administration were to remove Powell as the Chair of the Board, he could remain a member of the Board of Governors – and sue. While the case winds its way through the courts, things could get interesting.
The FOMC elects its Chair independently. If the committee re-elected Board Governor Powell as FOMC Chair, Powell would remain the public face of the Fed. A scenario where two people have a claim to being Fed Chair would be unsettling for markets.
While this may seem like a theoretical debate, it’s important for investors to pay attention. Bond markets will take a dim view of uncertainty around monetary policy. One key indicator mortgage investors and borrowers can monitor is the term premium for ten-year Treasuries. The ten-year Treasury yield reflects expectations for the future path of short-term rates, plus a term premium. The New York Fed publishes data for a model that estimates this term premium.
What started as a trade shock has evolved into a financial shock in the form of a rising term premium as investors unwind risk and diversify away from US-dollar denominated assets. The independence of the Federal Reserve is increasingly at risk, and this will be reflected in the rising risk premium.
As seen in the above chart, the term premium has risen from the cyclical low of minus 0.33 per cent to 0.64 per cent, an increase of nearly 1 per cent. This is an important indicator of the market’s view of this policy risk, as a politicized Fed diminishes the appeal of holding Treasuries and dollars as reserve assets.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Over the past two weeks, we’ve explored both the Conservative and Liberal plans for affordable housing. This week, we turn our attention to what we believe a truly comprehensive housing strategy should include, from rethinking how governments partner with the private sector and consolidating federal housing agencies, to making rental development economically viable and modernizing housing finance tools.
Read the latest Housing Affordability Watch here: A Plan for Real Housing Progress
Independent Opinion
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