Zhongjin: How to trade if key officials of the Federal Reserve resign early?

CICC released a research report stating that if the chair of the Federal Reserve resigns early, under the assumption of other conditions remaining unchanged, it would be negative for the US dollar, positive for gold, bullish for the short end of the US bond market, and bearish for the medium to long end until the Federal Reserve restarts quantitative easing to suppress long-term interest rates. Benefitting from the potential early restart of the liquidity cycle, the stock market valuation may be positive in the medium term. However, if the chair of the Federal Reserve completes the current term as usual, CICC predicts that the US Treasury will issue a net of about $1.2 trillion in US bonds in the third quarter, potentially causing liquidity tightness. Ultimately, there is still the possibility of pressuring the Federal Reserve to restart quantitative easing and the liquidity cycle, which would still be positive for US stocks and gold, and negative for the US dollar. CICC predicts that during Trump's second term, monetary policy combined with fiscal policy may become normalized, and US liquidity is expected to remain abundant in the long term. CICC's specific analysis is as follows: Trump threatens to dismiss the chair of the Federal Reserve On July 16, Trump stated that he would dismiss the chair of the Federal Reserve, Jerome Powell, but later denied it. Since taking office, Trump has repeatedly pressured the Federal Reserve to cut interest rates quickly. Essentially, Trump's dissatisfaction with the Federal Reserve lies in the fact that it has not been able to coordinate monetary easing with his "big fiscal" plan. The "Big Beautiful Act" was finally passed on July 4, and the Committee for a Responsible Federal Budget (CRFB) expects it to increase federal debt by $4.1 trillion in the next 10 years. If temporary tax cuts are made permanent, it could increase debt by $5.5 trillion. It is expected that the deficit rate in Trump 2.0's term may remain around 6.5%-7% (refer to "Trump 2.0's 'Big Fiscal' Further Progress"). In the short term, CICC predicts that the US Treasury will issue about $1.2 trillion in net US bonds in the third quarter, potentially causing liquidity tightness (refer to "Trump 2.0's 'Big Fiscal' Further Progress"). Under high interest rates, interest payments on US bonds are expected to continue to grow rapidly, and the pressure of debt and deficits has led Trump to hope for continued loose monetary policy to coordinate with fiscal policy, to reduce debt burden and stimulate nominal economic growth. In this background, the conflict between Trump and the Federal Reserve on interest rate cuts has become increasingly prominent. The mechanism for the US president to dismiss the chair of the Federal Reserve The mechanism for the US president to dismiss the chair of the Federal Reserve is relatively vague. The chair and vice chair of the Federal Reserve are nominated by the president, confirmed by the Senate, and serve a 4-year term, but this only applies to the position of the chair; their term as board members remains 14 years. The Federal Reserve Board of Governors has a relatively clear "dismissal standard". Section 10 of the Federal Reserve Act of 1913 states that a Federal Reserve Board member can be "removed by the President for cause", but the law does not specify what constitutes "for cause", nor does it indicate whether the President has the authority to dismiss the Federal Reserve chair. Among the past chairs of the Federal Reserve, four have voluntarily resigned due to political pressure or compromise, but there has been no case of a Federal Reserve chair being directly dismissed by the US president. In May 2025, the US Supreme Court affirmed that the Federal Reserve is a "uniquely structured quasi-private entity" and its independence is specially protected, meaning the President has no authority to dismiss the chair due to policy disagreements. Whether the chair of the Federal Reserve resigns early or not, the independence of the Federal Reserve is being challenged. Studies have found that the Federal Reserve is often influenced by political pressure from the US President. Throughout history, the frequency of interaction and political pressure between the US President and the Federal Reserve has had an impact on Federal Reserve policy, especially in the 1960s and 1970s when fiscal dominance and twin deficits were becoming more severe, resulting in a significant weakening of the Federal Reserve's independence. Based on this study, strict independence was essentially present during the Volcker and Greenspan periods when the trend of fiscal deficits improved. When political pressure is high, the Federal Reserve tends to tolerate higher inflation over time. Historical impacts on the independence of the Federal Reserve The first was in 1933, in response to the Great Depression, when then-US President Roosevelt announced a ban on gold exports, prohibited the Treasury and financial institutions from converting currency and deposits into gold coins and bullion, formally suspending the gold standard, and raising the gold price from $20.67 per ounce to $35 per ounce, causing the US dollar to depreciate by over 40%. The Federal Reserve lost control over monetary policy, and was forced to accommodate fiscal expansion policies, resulting in the first significant weakening of its independence. The second was in 1971 when Nixon pressured then-Federal Reserve Chair Burns to cut interest rates in 1971 to ensure his re-election in 1972, and Burns eventually succumbed. In addition, in August 1971, Nixon announced the delinking of the US dollar from gold, signaling the end of the post-World War II "Bretton Woods system". Since the 1980s, under the leadership of Volcker and Greenspan, the Federal Reserve has reshaped the credibility of US monetary policy, thereby anchoring US inflation expectations more effectively, an important factor behind the US economy entering a period of "Great Moderation". Coincidentally, both times the US government directly intervened in the Federal Reserve, it was during periods of loose fiscal discipline, where monetary policy had to coordinate with fiscal policy. Currently, due to debt pressure (refer to "Trump's 'Big Reset': Debt Resolution, Transition from Virtual to Real, Dollar Depreciation"), Trump continues to increase pressure on the Federal Reserve, which may once again undermine the independence of the Federal Reserve. Regardless of whether the chair of the Federal Reserve resigns early, CICC predicts that Trump 2.0 will most likely adopt fiscal dominance and financial repression, with monetary policy coordinating with fiscal policies, leading to a trend of abundant US dollar liquidity. Implications of the early resignation of the chair of the Federal Reserve Historically, after the events of March 1933 and August 1971, the US dollar weakened, gold strengthened, the S&P 500 trended upward in the short to medium term, and the US bond yield curve steepened. In terms of equity, although the specific pace may vary, the S&P 500 overall showed a pattern of peaking before declining, with cumulative returns of 72% and 14% within 1 year and 2 years, and 35% and 7% respectively. Regarding the US dollar, the price of gold rose, especially after the breakdown of the Bretton Woods system in 1971, with gold prices rising by 57% in one year and 150% in two years, leading to a cumulative drop of 18% in the US dollar index over two years. After the events, the US bond curve showed a steepening trend. Chart 1: Federal Reserve Chairs Resigning Before Term End Data source: Federal Reserve History, CICC Research Department Chart 2: Political Pressure Impact and Frequency of Interaction between President and Federal Reserve Data source: Drechsel 2024, CICC Research Department Chart 3: Challenge to Federal Reserve Independence during Periods of 'Big Fiscal' Data source: Haver, CICC Research Department Chart 4: Forced Easing by the Federal Reserve Overall Benefiting S&P 500... Note: T+0 represents the moment of the Federal Reserve's independence being challenged, standardized to 1, measured in months Data source: Haver, CICC Research Department Chart 5: Steepening of US Bond Yields Curve Note: T+0 represents the moment of the Federal Reserve's independence being challenged, measured in months Data source: Haver, CICC Research Department Chart 6: Positive Impact on Gold Data source: Haver, CICC Research Department Chart 7: Negative Impact on US Dollar Data source: Haver, CICC Research Department