Trump edges closer to crossing the market's reddest line

• Trump risks plunging the global financial system into crisis if that threat becomes a reality and he attempts to remove Fed chair Jerome Powell or undermine his authority.

Driving the news: Trump demanded "major loser" Powell preemptively cut interest rates "NOW," in a post on Truth Social on Monday.

• Last week Trump said Powell's "termination cannot come fast enough;" his top economic advisor Kevin Hassett also told reporters the White House was investigating whether firing the Fed chair was an option.
• Late Monday, the Republican head of the House's Fed task force told Axios that Congress needed to protect the central bank's independence. "I don't know that we need any extra excitement in the markets right now," Rep. Frank Lucas said.

What they're saying: "Were Powell to be fired, the initial reaction would be a huge injection of volatility into financial markets, and the most dramatic rush to the exit from US assets that it is possible to imagine," Michael Brown, a market analyst at brokerage firm Pepperstone, wrote in a recent note.

The big picture: It's easy to imagine why a president would want low interest rates and cheap money policies that help juice the economy.

• But no U.S. leader in the past half-century has taken the risk of trying to force the Fed to make it happen.
• The last to try was Nixon, who urged Fed chair Arthur Burns to keep monetary policy loose in the run-up to the 1972 election. That political pressure appeared to work, but with disastrous consequences for inflation down the line.

For the record: "In line with his right to free speech as an American citizen and duty to our country as Commander in Chief, President Trump has always been transparent about his thoughts when he sees something going poorly, such as the Federal Reserve's inaction holding our economy back," White House spokesman Kush Desai said in a statement.

Threat level: The White House's tariff regime has already tarnished America's reputation as the world's financial anchor.

• A politicized Fed could obliterate it: There would likely to be a swift move to sell U.S. assets no longer considered reliable.
• Long-term interest rates might surge, making it more onerous for the government to borrow the money the nation needs to operate.

Reality check: Financial market weakness worsened after Trump's latest threat to the Fed.

• Stock prices are plummeting, the U.S. dollar is depreciating and bond yields are spiking — a combination that suggest investors are re-evaluating the safety and desirability of American assets.
• For his part, Powell has repeatedly stated his intentions to finish out his term as Fed chair, which ends in May 2026.

The intrigue: Market watchers and economists admit that the risk is rising, but few believe Trump would risk such monumental damage to the global economy and financial system — a similar sentiment that prevailed before his reciprocal tariffs.

• "It is still unlikely that Trump pulls the trigger and fires Powell: We don't think the legal fight or the market pain (particularly in the bond market) is worth it for the Administration," Pimco's Libby Cantrill wrote in a client note.
• "But even if Powell stays, Trump could be doing longer-term damage to the mere perception of the independence of the Fed, which may continue to make dollar-based investors more weary and wary," Cantrill adds.

How it works: The Fed is granted independence to set interest rates in pursuit of its congressionally mandated goals of maximum employment and stable prices — not the political whims of the White House.

• If the American public believed that the Fed would sit back while prices rose rapidly to appease the president, inflation expectations would soar.
• That is a dangerous possibility that Powell wants to avoid. High inflation expectations can become a self-fulfilling prophecy.

The bottom line: Trump lambasted Powell throughout his first term, but the threat to Fed independence looks bigger in Trump 2.0.