COLUMN-Risk of Powell firing is too big to price: McGeever

By Jamie McGeever

ORLANDO, Florida, April 17 (Reuters) - Just like a global trade war, the dismissal of the chair of the Federal Reserve by the U.S. President is an event investors know will be unequivocally bad for markets. But it is also a risk that is too far-reaching to properly quantify, meaning the market might be forewarned, but it won't be forearmed.

U.S. President Donald Trump on Thursday escalated his feud with Fed Chair Jerome Powell - who Trump himself nominated in 2017 – writing on social media that "Powell's termination cannot come fast enough" and later telling reporters that the Fed chair is "playing politics".

Trump's social media broadsides against Powell for not cutting interest rates are so numerous that jaded investors could be forgiven for dismissing them. But they shouldn't.

Trump's salvo on Thursday comes only days after the Supreme Court cleared the way for him to fire Democrats from two federal labor boards before their terms expired, a move that some lawyers and analysts argue could leave Fed officials like Powell vulnerable. Powell said on Wednesday he didn't think this applied to the Fed, but he wasn't sure.

This latest tirade comes at an extremely dangerous moment for U.S. and world markets. Faith in the dollar and Treasuries, confidence in U.S. economic policy, and trust in U.S. institutions and governance have rarely been lower.

This is putting upward pressure on the 'term premium' in the U.S. bond market. That's the somewhat amorphous level of compensation investors demand for taking the risk of lending to the U.S. government over the long term rather than rolling over shorter-term loans. The term premium is its highest in a decade.

It's not difficult to see why investors might be getting twitchy. Faith in central bank independence is foundational in the modern financial system. That's because politically influenced monetary policy may be popular and stimulative in the short term but damaging in the long term.

As former Fed Chair Ben Bernanke said in 2010: "Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation."

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What makes the situation especially dicey is that even though investors are highly aware of this risk, they can't truly price it in. The term premium has risen, but not anywhere close to where it would likely soar to if the Fed's independence were truly called into question. The risk is too monumental, and the range of potential outcomes is too broad.

That's essentially what happened with the trade war. Tariffs were Trump's number one economic policy on the campaign trail, and he was elected on that platform. It's not for nothing that Trump referred to himself as "Tariff Man."

Yet U.S. markets kept rising after his election, not necessarily because investors didn't believe Trump, but more likely because they simply had no clear way to price in the risk of an all-out global trade war. So even though investors knew "Liberation Day" was coming, markets still gyrated wildly after it arrived.

The S&P 500 plunged 15%, wiping $6 trillion off the value of U.S. stocks in just three days. The long end of the U.S. bond market cratered too, triggering the 30-year yield's biggest weekly rise since 1982, and the dollar sank 3%.

The slump in Treasuries and the dollar was particularly alarming, as they usually rise in times of financial, economic or political crisis. Gold and the Swiss franc had one of their best weeks in decades, but the U.S. "safe havens" tanked.

This is a cautionary tale for markets as tensions rise between the White House and the Fed, especially U.S. markets. If Trump does remove Powell before his term ends in May next year, investors can't say they weren't warned. But it likely won't matter because the consequences are simply too big to price.

(The opinions expressed here are those of the author, a columnist for Reuters.)