The principal economic advisor to President Donald Trump has suggested that former Federal Reserve Chair Jerome Powell should step down from the central bank’s board, igniting further discussions about the Fed’s policy direction weeks after officials adjusted interest rates for the first time in three years.
Summary
- Trump advisor Kevin Hassett has urged Powell to vacate his position on the Federal Reserve board following a report from an internal watchdog that highlighted management issues related to its headquarters renovation.
- Despite leaving the Fed chair position in May, Powell continues to hold a vote in the FOMC, which means his exit could present Trump with another chance to appoint a new governor.
- The impact on Bitcoin will rely on whether Powell’s potential successor alters future interest rate expectations, rather than his exit alone.
- After weak payroll numbers in September, market expectations for an interest rate hike in October have diminished, although another increase could still happen later this year.
- Notwithstanding the Fed’s rate hike in September, Bitcoin has rebounded due to renewed spot ETF investments, even as elevated Treasury yields persist as a pressure point.
As reported by Bloomberg, National Economic Council Director Kevin Hassett expressed on Fox News’ Sunday Morning Futures that it was appropriate for Powell to “move on” following an internal watchdog report that identified management challenges related to the renovation of the Federal Reserve’s headquarters in Washington.
“I believe it’s time for him to move on and to honor the Fed’s independence,” Hassett stated in response to whether Powell should resign.
President Trump also called for Powell to be “forced to resign from the Board” in the wake of the report, exerting pressure on the former chair after repeatedly advocating for lower borrowing costs during Powell’s term.
For Bitcoin investors, Powell’s role is significant since he remains on the Federal Open Market Committee after Kevin Warsh succeeded him as chair in May. His departure would create an opening on the seven-member Board of Governors that Trump could fill by nominating a candidate for Senate approval.
The impact on Bitcoin would hinge less on Powell’s exit by itself and more on whether the new nominee shifts expectations regarding future interest rates.
Powell continues to hold voting power on Fed interest rate decisions
Powell has retained his position on the Board of Governors after completing his term as chair in May, which diverges from the common practice of former Fed chairs exiting the central bank upon stepping down.
This means Powell still has voting power on monetary policy decisions. Currently, the Fed lists him as one of the 12 voting members of the FOMC alongside Warsh and other governors and regional Fed presidents.
If Powell decides to resign before the end of his term as governor, Trump would have the opportunity to nominate someone to complete the remaining term, pending Senate approval.
This personnel issue arises less than three weeks after the FOMC unanimously raised the federal funds target range by 25 basis points to between 3.75% and 4% on September 16.
Hassett remarked on Fox News that he disagreed with the decision but held respect for Warsh, believing it was made for valid reasons.
Initially, Bitcoin struggled around the September meeting before staging a recovery. As reported by crypto.news, BTC eventually soared past $87,000 post-hike, bolstered by renewed interest in spot Bitcoin ETFs and corporate purchases.
During the period spanning September 15 to 16, U.S. spot Bitcoin ETFs saw a drop of $746.3 million before experiencing about $2.65 billion in net inflows over the five sessions leading up to September 23. Additionally, Strategy acquired another 950 BTC for $75.7 million between September 14 and September 20.
Bitcoin’s rebound doesn’t eliminate the risk of rate hikes. HashKey Group senior researcher Tim Sun has identified another Fed rate increase as a more significant threat to BTC than delays in the CLARITY Act, monitoring factors such as Treasury yields, ETF flows, and derivative leverage.
Could Powell’s exit be advantageous for Bitcoin?
Powell’s departure by itself would not automatically assure lower interest rates or provide immediate liquidity for Bitcoin.
Trump would need to nominate a successor, who would then require Senate confirmation. Ultimately, the influence would depend on the monetary policy stance of the new governor and how their appointment affects voting dynamics within the FOMC.
Trump has consistently advocated for lower borrowing costs, while Warsh and the rest of the FOMC justified the September rate increase as inflation persisted above the Fed’s 2% target.
Expectations regarding rates have shifted in a manner favorable to Bitcoin since then, even without any changes in the Fed’s makeup.
Federal Reserve Vice Chair Philip Jefferson noted last week that more deliberation may be needed before taking any further action on interest rates, with New York Fed President John Williams suggesting that while another hike might be necessary, it isn’t urgent.
As a result, market expectations for an October rate hike have been scaled back. By October 5, the likelihood of another increase this month had dropped to around 18%, while traders anticipated a much stronger chance of a hike in December.
In response to the softer outlook for October, Bitcoin briefly exceeded $87,000 on October 2, following a September jobs report that saw only a 29,000 increase in nonfarm payrolls, significantly below expectations. This reinforced projections that policymakers might consider pausing rate increases during their meeting from October 27 to 28.
The cryptocurrency was trading near $86,000 over the weekend, following a closing price around $83,600 on September 30.
This year’s price movements have indicated that Bitcoin frequently reacts to shifts in anticipated Fed policy. In July, BTC surpassed $65,000 after softer producer inflation tempered rate hike expectations, while Warsh’s more hawkish signals have previously exerted pressure on the cryptocurrency.
High Treasury yields continue to challenge Bitcoin
A less aggressive outlook from the Fed could prove beneficial for Bitcoin, should it result in lower Treasury yields and diminish the appeal of interest-bearing assets, but the bond market has not completely aligned with the decline in October rate hike expectations.
As the new week commenced, U.S. Treasury yields remained elevated, and the dollar strengthened despite the disappointing job numbers from September.
Long-term yields have proven especially resistant. The 10-year Treasury yield recently surpassed 5.3%, maintaining tight financial conditions despite growing investor skepticism regarding another Fed rate hike this October.
High yields continue to serve as a significant macroeconomic pressure for Bitcoin. Investors find greater returns from government debt without exposure to the volatility linked with cryptocurrencies, while rising yields could tighten financial conditions across riskier assets.
Nonetheless, Bitcoin has demonstrated that demand can mitigate some of that pressure. The cryptocurrency’s recovery following the September hike was accompanied by resurgent ETF inflows, illustrating that the connection between Fed tightening and BTC is not uni-directional.
A September rate hike analysis had already identified institutional demand as a potential factor that could ease the conventional pressures that higher rates exert on cryptocurrencies, even while strict monetary policy continues to raise the cost of holding risky assets.
The immediate focus will shift to the Fed’s October meeting. The weak September payroll growth has lessened the argument for another rate hike this month, although inflation remains above target, and markets appear to expect another increase could occur before the year’s end.
Powell, for his part, has mentioned that threats of criminal investigations into him and the Federal Reserve have left him little choice but to remain on the board.
The Justice Department announced on Friday that it would not reopen a criminal investigation based on the findings of the Fed inspector general. The watchdog identified no evidence of criminal misconduct or misadministration linked to the $2.4 billion headquarters renovation but did highlight management deficiencies that contributed to the project’s overruns.
Attorney General Todd Blanche stated that an independent audit could still prompt an investigation if it reveals any evidence of criminal acts, and the Fed has indicated that an outside auditor will assess the renovation expenses.