Tianfeng: What potential impact would there be if the independence of the Federal Reserve is weakened?

Tianfeng published a research report stating that Trump is considering new candidates for the Federal Reserve Chairman appointment, raising concerns in the market about the "independence" of monetary policy. If Trump nominates a Federal Reserve Chairman with a MAGA color and close personal connections, there may be four effects: rising stagflation risk; exacerbating fiscal concerns; weakening the status of the US dollar, leading to capital outflows; and for the market, it may result in a sell-off of US stocks, bonds, and the dollar. In the event of a "black swan" incident where the Federal Reserve is hijacked by the White House, US stocks, bonds, and the dollar may be sold off. 1. Who are the candidates and what are their backgrounds? Three main candidates: Waller, Hassett, and Walsh. Waller: Currently a member of the Federal Reserve Board, representing the dovish camp. His advantage lies in his familiarity with the operation mechanisms of the Federal Reserve system. Waller's qualification as a Federal Reserve Board member was appointed by Trump, and his advocacy for interest rate cuts is highly consistent with the White House. If elected, it may raise questions in the market about the independence of the central bank. Hassett: Served as the head of the White House National Economic Council (NEC). During Trump's presidency, Hassett contributed to almost all economic sectors, including the 2017 tax cut law, trade policy, and deregulation. The disadvantage is his relatively lack of experience in monetary policy, and he is considered too close to the government. Walsh: Walsh's strength lies in his rich experience in Wall Street, government departments, the Federal Reserve, and academia. He became a Federal Reserve Board member in February 2006. Walsh is seen as a dove, supporting Trump's interest rate cut proposal. The downside is that he has never served in Trump's government team and it is difficult to have direct contact with Trump. Other candidates include: current Federal Reserve officials such as Bowman, Jefferson, and Logan; financial institution professionals such as Rick Rieder of BlackRock and David Zervos of Jefferies Group; former Federal Reserve officials such as Lindsay and Brad; and former government economists like Sammelin. Milan, who has recently been nominated as a Federal Reserve Board member, may be a "dark horse". Milan is an advocate of equal tariffs and leans dovish on interest rate issues. Milan advocates weakening the independence of the Federal Reserve by shortening the terms of the board members and allowing the president to dismiss them, thus widely doubted for damaging the central bank's credibility. 2. How the transition of the Federal Reserve Chairman is conducted, including procedures and rules? The president usually announces the nomination 3-6 months in advance, with an average of 4 months from nomination to appointment. If Trump announces the candidate in September or October this year, Tianfeng believes it may raise doubts in the market about Trump's "impatience" in setting up a "shadow Federal Reserve". After Powell steps down as chairman, it is expected that he will likely resign from his position as board member and leave the Federal Reserve; however, there is also a historical precedent for a former chairman to continue serving as a board member. Of the 7 board members currently, except for Milan and Powell, the terms of the other members continue beyond 2028, making it difficult for Trump to interfere. 3. What potential impact would weakening the independence of the Federal Reserve have? If Trump nominates a Federal Reserve Chairman with a MAGA color and close personal ties, Tianfeng believes there may be four effects: First, the risk of stagflation may rise. Nixon's policy intervention with Federal Reserve Chairman Burns in the 1970s sowed the seeds for stagflation in 1973-1974. The impact of current tariffs on inflation is still unclear, but if a new Federal Reserve Chairman with close personal ties is appointed, the market may fear a replay of Burns' "script". Second, exacerbating fiscal concerns. The high deficit rate and rising debt in the US have already sparked concerns about the safety of US treasuries. If the independence of the Federal Reserve is lost again and becomes a tool to comply with the fiscal policy, concerns about a debt crisis may intensify. Third, weakening the status of the US dollar, leading to capital outflows. The dominant position of the US dollar as the world's reserve currency largely depends on the credibility of the Federal Reserve. If the Federal Reserve is seen as politically controlled, foreign official institutions and market investors may accelerate the diversification of their dollar assets towards alternative assets such as gold. For the market, it may trigger a sell-off of US stocks, bonds, and the dollar. In July this year, the financial market experienced a "Powell ousted" pressure test, confirming the high importance the market places on the "independence" of the Federal Reserve. In the event of a "black swan" incident where the Federal Reserve is hijacked by the White House, US stocks, bonds, and the dollar may face sell-offs.