Dangerous Waters: What Happens to Crypto If Trump Fires Powell?

The relationship between political leaders and central bankers is often fraught with tension. In recent times, the dynamic between former US President Donald Trump and Federal Reserve Chair Jerome Powell has captured significant market attention. This conflict raises a crucial question for the digital asset world: If Trump were to fire Powell, what exactly would happen to crypto?

The Trump vs. Powell Conflict

The core of the tension lies in differing views on economic management. Donald Trump has consistently advocated for lower interest rates, viewing them as a tool to stimulate the economy and boost market performance. He believes this approach reflects positively on his administration’s success.

Jerome Powell, conversely, is tasked with navigating the Federal Reserve’s dual mandate: maximizing employment and maintaining stable prices. This requires setting interest rates based on economic data and rigorous analysis, not political pressure. Maintaining the Fed’s independence is paramount, not just in practice but in appearance. If markets perceive the central bank as politically controlled, it could undermine confidence in US sovereign debt, making it more expensive for the US government to borrow money. Given the nation’s significant debt, increased borrowing costs could strain the economy.

Why Federal Reserve Independence is Crucial

Economists widely agree that a central bank’s independence from short-term political goals is vital for economic stability. Politicians operate on election cycles, favoring policies that deliver quick results, like injecting cash into the economy via low rates. However, monetary policy requires a longer view, sometimes necessitating painful decisions to control inflation or prevent bubbles.

History offers stark warnings. In the 1970s, President Nixon pressured then-Fed Chair Arthur Burns for expansionary policies before an election. Nixon won, but the result was a decade of damaging ‘stagflation’ (high inflation and stagnant growth). Later, Paul Volcker, unburdened by political pressure, implemented sharp rate increases in the 1980s. This caused recessions but ultimately brought inflation under control, paving the way for future growth.

Nations where central banks fell under political control, like Weimar Germany or Venezuela, experienced crippling hyperinflation, leading to severe economic and social crises. This history underscores the importance markets place on the Federal Reserve’s autonomy.

Can Trump Actually Fire Powell?

Legally, the situation is complex. The Federal Reserve Act states members can be removed by the President “for cause.” A 1935 Supreme Court case, Humphrey’s Executor v. United States, limited the President’s power to remove heads of independent agencies without specific cause. The Fed is considered such an independent agency.

However, some legal scholars believe the current Supreme Court might revisit this precedent. If Trump were to challenge it and succeed, it would fundamentally alter the balance of power, giving the President unprecedented authority over the Fed chair and other independent agency heads. This would be a significant shift with potentially profound economic consequences.

Potential Outcomes for Crypto

The original thesis behind Bitcoin was to create a financial system independent of trusted third parties like central banks. A presidential assault on the Federal Reserve’s independence would test this thesis, pushing crypto into uncharted territory. The effects could be dual-natured, presenting both potential opportunities and significant challenges.

Here are some potential scenarios for crypto markets:

• Capital Flight to Bitcoin: Historically, investors sought safety in US Treasurys during times of crisis. However, if trust in the US government’s financial stability erodes due to political interference with the Fed or concerns about debt, this could change. Money might flow out of traditional assets, potentially seeking refuge in alternative assets like Bitcoin. Some market observers speculate that recent Bitcoin price movements, seemingly decoupling from traditional markets like the Nasdaq, could signal the beginning of this trend.
• Stablecoin Crisis and Contagion: A significant challenge arises for stablecoins, particularly those collateralized primarily by US Treasurys, such as USDC and USDT. If a Fed crisis led to a loss of confidence in US debt, or even a potential sovereign default (an idea Trump has hinted at in the past), the value of this collateral would plummet. This could leave stablecoins undercollateralized, potentially triggering bank runs and forcing liquidations across the crypto market as smart contracts holding stablecoins as collateral unwind. This could cause widespread price crashes.
• Geopolitical Shift and Regulation: The US dollar’s role as the world’s reserve currency gives the US significant influence over global finance. If this role weakens due to a loss of confidence stemming from a Fed crisis, other currencies like the Euro or Yuan might gain prominence. This shift could mean regulators in Europe and China gain more control over global financial flows, including those related to cryptocurrency. This could lead to increased or different forms of regulation impacting the crypto industry globally.

Uncertainty Reigns for Crypto Markets

Predicting the exact outcome is impossible. If Trump fires Powell, the subsequent events would be unprecedented in modern US history. The crypto industry could potentially see its foundational thesis validated, attracting significant capital fleeing instability in traditional finance. Conversely, the crisis could trigger a collapse in stablecoins, which are deeply integrated into the crypto ecosystem, causing immense damage and setting the industry back years.

Ultimately, the fate of crypto in such a scenario is tied to the broader economic and political fallout. It’s a situation fraught with risk, offering both potential validation and existential threat to the digital asset space. Like it or not, the crypto market is watching this political tension closely.