How will the Crypto Assets market react if Trump replaces Jerome Powell?

Source: Cointelegraph Original text: "How will the cryptocurrency market react if Trump replaces Jerome Powell?"

In recent months, a pattern has been repeatedly played out: U.S. President Trump takes certain actions that objectively harm the U.S. economy, which triggers market turbulence, and then turns to Federal Reserve Chairman Jerome Powell, demanding that he lower the federal funds rate (the rate at which the Federal Reserve lends to banks). However, the resolute Powell always responds: "No."

Trump hopes to lower interest rates, as this is an effective means of injecting liquidity into the U.S. economy, which can stimulate economic activity and boost the market. He believes this can showcase his achievements. On the other hand, Powell insists on setting interest rates based on rigorous economic standards to balance the Federal Reserve's dual mandate of "maximizing employment" and "stabilizing prices."

The struggle over the independence of the Federal Reserve is drawing significant attention from the market. The primary task facing Fed Chairman Powell is not only to maintain the central bank's independent decision-making authority but also to ensure external confidence that the Fed is not subject to political interference. Market analysts point out that if investors begin to question the Fed's independence, the U.S. Treasury market could suffer a severe blow, which would undoubtedly be an additional burden for the U.S., already burdened with $30 trillion in debt.

In the current economic situation, the issue of financing costs for U.S. government debt has become particularly sensitive. Experts warn that if the market loses confidence in the U.S. government, leading to a rise in refinancing rates, then interest expenses alone could severely burden the U.S. gross domestic product, which would have catastrophic consequences for the U.S. economy.

Recently, the political struggle surrounding the position of the Federal Reserve Chairman has intensified. Trump hinted multiple times last week about replacing Powell, causing severe market turmoil. On Monday, Trump directly criticized Powell as a "big loser" on the Truth Social platform, leading to a market drop. In light of this situation, Treasury Secretary Scott Bessent has reportedly expressed concerns about the associated risks to Trump. Fortunately, Trump seems to have realized the seriousness of the issue, publicly stating on Tuesday that he would not fire the current Federal Reserve Chairman, temporarily calming market fears.

Illustration: Trump and Powell in 2017 Source: Trouw

Last week, Trump hinted multiple times that he might replace Powell, causing the market to fall in response. On Monday, he further criticized Powell as the "number one loser" on Truth Social, triggering a stock market crash. Reports indicate that Treasury Secretary Scott Bessent has informed Trump about the risks of replacement, and on Tuesday, Trump temporarily backtracked, stating that he would not fire Powell. However, observers believe this is more like the beginning of a vicious cycle, with the core issue being: if Trump truly replaces Powell, what impact will it have on the cryptocurrency industry?

It is important to point out that the president of the United States cannot remove the chairman of the Fed at will. Section 10 of the Federal Reserve Act of 1913 clearly states: "Each member shall serve fourteen years from the date on which the term of office of his predecessor expires, unless he is removed from office early by the President for specific reasons." ”

This statement seems vague, but in the 1935 case of "Humphrey's Executor v. United States," the Supreme Court ruled that the Constitution does not grant the President "unlimited removal power," thus the President's removal power is subject to legal provisions. This ruling established the legal concept of "independent agencies"—these agencies, although part of the executive branch, possess independent decision-making authority. While agencies like the SEC, CFTC, and FTC exhibit this characteristic, the Federal Reserve is undoubtedly the most significant independent agency.

Economists typically pay less attention to the issue of central banks being subject to political manipulation. The decision-making motives of politicians often have a short-term nature, with their thinking cycles measured in years or election cycles. This characteristic naturally drives them to favor short-sighted policies, with hot money inflows being the most typical manifestation. However, fiscal and monetary policies require a delicate balance and often accompany painful policy choices.

The classic case occurred before the 1972 election, when Richard Nixon pressured then-Federal Reserve Chairman Arthur Burns to implement expansionary monetary policy, believing that it would improve his chances of re-election. Although Nixon won the election by a landslide, the ensuing catastrophic "stagflation" paralyzed the U.S. economy for a decade, and the aftermath is still being felt in the hard-hit industries.

This stands in stark contrast to Paul Volcker's policies. After the end of the stagflation period, Volcker implemented a series of aggressive interest rate hikes from 1979 to 1987, triggering a chain of economic recessions known as the "Volcker Shock." However, this policy ultimately curbed inflation, paving the way for the economic prosperity of the 1990s and creating conditions for Bill Clinton's outstanding fiscal policies.

No politician can make such a choice; none have in the past, and none will in the future—and this is precisely the crux of the matter. Economists (and more importantly, market participants) firmly believe that the Federal Reserve must maintain its independence; otherwise, the entire economic structure of American society will face the risk of collapse. This is by no means alarmist: countries like Weimar Germany, Argentina during the Perón era, and Venezuela, where central banks were subject to political manipulation, have all experienced catastrophic hyperinflation, leading to geopolitical setbacks for generations, reports of people starving to the point of eating rats, and the rise of Adolph Hitler. This is an extremely serious historical lesson.

If Trump wants to remove Powell, he first needs to overturn the precedent set by the "Humphrey's Executor case." Given the current composition of the Supreme Court, many legal scholars believe this possibility is quite high. It's like crossing the Rubicon; once crossed, there is no turning back. Not only Trump, but every president thereafter will gain absolute legal power to command all executive officials (including the Federal Reserve Chairman) at will. Most believe this will lead to disastrous consequences.

But regardless of whether it leads to disaster, this will become the touchstone for cryptocurrency. The original purpose of the Bitcoin white paper was to liberate financial transactions from "the financial institutions acting as trusted third parties." If the Federal Reserve collapses and U.S. monetary policy deviates from rational decision-making anchors, the value of the early concepts of cryptocurrency will suddenly become prominent.

In recent weeks, the capital outflow triggered by Trump has led investors to seek various safe-haven assets. Conventional wisdom suggests that during a crisis, savvy money always flows from risk assets to U.S. Treasuries—once considered risk-free assets. However, that era may be coming to an end: during the peak of the tariff crisis, the yield on the ten-year Treasury approached 5% and has not fully returned to historical lows. If Trump destroys the independence of the Federal Reserve, this outflow of funds will be like droplets flowing into a river, and a portion of it is likely to surge into the cryptocurrency space.

Trump warns Powell, calling him "Mr. Slow on the Uptake" Source: Donald Trump

Historically, Bitcoin prices have always been highly correlated with the Nasdaq index (albeit with greater volatility). However, since the onset of the tariff crisis, Bitcoin has miraculously risen against the trend while U.S. stock prices have remained low. This raises the question: the long-predicted "decoupling" moment may be upon us—crypto assets will ultimately fulfill their original purpose and break free from the correlation with traditional centralized assets.

While it is still difficult to say whether this prophecy will come true, if Trump really dismisses Powell, we will surely witness the answer revealed.

Jumping out of the frying pan and into the fire

Of course, a world-class economic collapse is by no means purely beneficial for cryptocurrencies; this crisis will also bring about intense pain on multiple levels. The first to be hit hard will be stablecoins—they will face a deadly blow immediately.

Over the past decade, the dollar stablecoins USDC and USDT have consistently dominated the market. Their issuers, Circle and Tether, are not only important systemic institutions but also major buyers of U.S. Treasury bonds, which constitute the underlying collateral assets of their stablecoins.

The most direct consequence of the Federal Reserve crisis may be a default on U.S. debt. Economist Noah Smith once speculated that Trump might attempt to write down U.S. sovereign debt:

"With his business style, he would always seek cheap bailouts when debts worsened, and if that failed, he would declare bankruptcy."

In fact, in February of this year, Trump himself hinted obscurely that he might reduce debt through "technical means":

"Government bonds may encounter issues, and some debts should not count at all, because we have discovered a large amount of fraud among them."

Sovereign default will directly lead to the devaluation of the collateral assets of Circle and Tether, which will then trigger insufficient collateral for stablecoins and induce a run on the bank crisis. The market may eventually stabilize, but it is more likely to evolve into a full-blown collapse of mainstream stablecoins.

This will trigger a series of chain reactions: smart contracts collateralized by stablecoins will start liquidating positions, and the risk will spread throughout the market. Interestingly, the impact of these technical aspects may be far less severe than the political costs of the Federal Reserve crisis—because there is much more at stake for the crypto system than just U.S. Treasuries.

The U.S. dollar has been the world's reserve currency for decades, and its strength and stability form the basis of international trade settlements. But if the credit pillar of the U.S. government collapses, the paradigm will shift. As more transactions move to euro- or yuan-denominated accounts, EU and Chinese regulators will have greater control over fiat access to the crypto market. A well-known crypto lawyer, who asked not to be named, confessed:

"China will fill most of the vacuum, while the EU will take over the remaining part. The excessive regulation by the CCP and the EU is certainly not a blessing for the crypto industry."

This may drive funds towards uncollateralized native crypto assets, but there is no successful precedent for such assets in large-scale real transactions. A more likely scenario is that the stablecoin crisis severely impacts the crypto industry, which is at a critical stage of development, causing it to stagnate for years.

In the end, no one knows whether Trump will (or can) dismiss Powell, and even fewer can predict the ultimate impact of his decisions. But if the flutter of a butterfly in Argentina can trigger a hurricane in Prague, then the spells cast in the West Wing of the White House will surely forever change the trajectory of blockchain's fate.

Whether we are willing or not, we have already boarded this speeding train.

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