President Donald Trump could move to oust Federal Reserve Chair Jerome Powell present "another substantial headwind" for financial markets already grappling with uncertainty around U.S. trade policy changes, according to analysts at Sevens Report.
The main averages on Wall Street all fell by more than 2% on Monday, as investors assessed remarks from the White House which seemed to suggest that officials were mulling possibly ousting Powell.
Trump himself has also hit out at the Fed leader, calling him a "major loser" and "Mr. Too Late" and arguing that he has not moved fast enough to slash interest rates to support the broader economy.
The Wall Street Journal has reported that Trump may be laying the groundwork to blame Powell for any economic weakness resulting from the president’s tariff policies.
In a note to clients, the Sevens Report analysts argued that if Trump moves to encroach on the Fed’s independence, it could lead to a legal showdown that would exacerbate recent worries over an uncertain business outlook, and possibly send the benchmark S&P 500 down below 5,000. The index finished at 5,182.20 on Monday, shedding 2.4%.
Crucially, the analysts said that investor appetite for U.S. assets, particularly Treasury bonds, has been underpinned by "unwavering" rule of law and the "rock-solid structure" of the American government.
"Put plainly, global investors buy U.S. assets and come to the U.S. to innovate because [t]hey know the rules (the court system is well established and broadly viewed as impartial) and [t]hese rules don’t change based on the latest elections or on which power is in control in Washington," the analysts wrote.
Trump’s recent scathing attacks on Powell, however, "erode this idea of solid structure of the government and as such, erode the idea of American economic exceptionalism," they added.