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CNN
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There could be a revolt in global markets, including a possible collapse in the dollar and US bonds, if President Donald Trump were to take the unprecedented step of removing Federal Reserve Chair Powell from the helm of the central bank, as the president has suggested he could do.
The US dollar index, which measures the dollar’s strength against six major foreign currencies, dropped as much as 0.8% Wednesday morning after reports that Trump was moving closer to removing the Fed chair. CBS News first reported the news.
Trump later Wednesday told reporters at the White House it is unlikely he would fire Powell, pushing back on media reports.
“We’re not planning on doing anything,” Trump said. “I don’t rule out anything, but I think it’s highly unlikely, unless he has to leave for fraud.” The dollar index pared its losses after Trump’s remarks and was down just 0.3% as of midday.
The Fed’s independence is a cornerstone of US financial markets, and perceptions of an erosion of that independence could spark a sharp sell-off in the dollar and US government bonds that could have lasting damage for America’s markets and its economy — along with its international reputation.
US markets have been volatile this year as Trump has ramped up his criticisms of Powell, demanding the central bank lower interest rates.
But Wall Street has maintained that the likelihood of the president actually moving to oust the Fed chair remains low, due to legal uncertainties and awareness of officials like Treasury Secretary Scott Bessent that markets would reject the move.
“Trump wants lower interest rates: He thinks ousting Powell will make a difference, but most market analysts think it would send a signal that the Fed has lost its independence,” Greg Valliere, chief US policy strategist at AGF Investments, said in a note.
The Fed’s independence is paramount. Financial markets favor independent central banks that can focus on inflation and the labor market without concerns of political interference. Investors perceive the United States as a great place to invest specifically because of the nation’s strong institutions.
A breakdown in the perception of Fed independence is the equivalent of enormous reputation damage that could be almost impossible to repair.
Markets in recent days have not been “pricing in” the possibility of Powell’s removal, analysts say, which leaves room for a severe reaction in markets if Trump catches investors off-guard and goes forward with a legally contentious move to assert control over the Fed.
George Saravelos, global head of FX strategy at Deutsche Bank, said in a Friday note that the removal of Powell is “one of the largest under-priced event risks” for markets.
“It is stating the obvious that investors would likely interpret such an event as a direct affront to Fed independence, putting the central bank under extreme institutional duress,” Saravelos said. “With the Fed sitting at the pinnacle of the global dollar monetary system it is also stating the obvious that the consequences would reverberate far beyond US borders.”
Saravelos said he expects the dollar would drop 3% to 4% in 24 hours if Powell were fired, which is an enormous move in currency markets.
“The empirical and academic evidence on the impact of a loss of central bank independence is fairly clear: In extreme cases, both the currency and the bond market can collapse as inflation expectations move higher, real yields drop and broader risk premia increase on the back of institutional erosion,” Saravelos said.
Bets on Polymarket on Wednesday showed traders expect a 24% chance Trump will fire Powell this year, which is the highest percentage since the bet was created at the end of last year.
An assault on the Fed’s independence could cause a flight from American assets.
The US dollar’s strength and premier status could be jeopardized if investors lose the perception that the Fed is independent, according to Francesco Pesole, an FX strategist at ING.
“An independent Fed is a key foundation of the dollar’s reserve currency appeal,” Pesole said. “Markets hold a currency as reserve when they have long-term expectations that inflation will be under control and the bond market will work smoothly. In the case of the dollar this is fundamentally guaranteed by the Fed being independent from politics.”
“So should markets interpret any changes at the helm of the Fed as a loss of that independence, the incentive to hold dollars will be diminished,” Pesole said.
The dollar in May hit a three-year low after Trump levied a flurry of criticisms against Powell.
Bond markets could also be rocked by an erosion of Fed independence.
The 30-year Treasury yield on Tuesday rose above 5% for the first time since June. A sustained, continued rise in yields could send a signal that markets are pushing back on the Trump administration’s attacks on Powell.
Bond prices and yields trade in opposite direction. A rise in yields could signal investors are selling or refusing to buy US bonds and demanding higher rates to compensate for the perceived added risk of holding US debt.
“At a minimum, we would expect a sustained and persistent risk premium to be subsequently embedded in both the US dollar and the Treasury market, with exceptionally high sensitivity to both the mix of data and the conduct of monetary policy in the subsequent months,” Deutsche Bank’s Saravelos said.
Damage to the Fed’s credibility could make inflation a more persistent issue. A Fed that is perceived to lower rates prematurely to meet political demands could ignite concerns about inflation and cause bond holders to demand higher yields.
Trump, who favors lower rates and has even proposed a rate cut of three points — which would be an unprecedented step and in itself a market-moving event — has long talked about removing Powell for not lowering borrowing costs quickly enough.
But legal safeguards protect the Fed chair from an attempt by the president to fire him. Investors think members of Trump’s own Cabinet would even advise against such a move.
“We doubt that Trump will actually try to fire Powell on this basis with Bessent likely warning of the mayhem this would cause in markets, and serious doubts the Supreme Court would uphold the decision,” Krishna Guha, vice chairman at Evercore ISI, said in a note.
The Supreme Court thus far has signaled it would uphold the Fed chair’s position other than a “for cause” removal, “which is interpreted in legal terms as narrowly related to misconduct,” and not “policy disagreements,” according to Guha.
The White House in recent days has been ramping up its criticisms of the Fed’s ongoing construction project to renovate the central bank’s headquarters in Washington, DC, effectively building a potential “for cause” case for firing Powell.
Senior Trump administration officials Director of the Office of Management and Budget Russell Vought and Director of the Federal Housing Finance Agency Bill Pulte have turned up the heat on criticizing the Fed’s building renovation.
A reporter on Tuesday asked Trump if Powell’s handling of the renovation was a fireable offense. “I think it sort of is,” Trump said.
Powell has asked the central bank’s inspector general to conduct an additional review of the ongoing renovation, CNN previously reported. The Fed also published a lengthy FAQ on its website, detailing the minutiae of the renovations and clarifying that cost overruns were due to factors including “more asbestos than anticipated” and “a higher-than-expected water table,” along with rising costs due to inflation and necessary changes to the building designs.
“We have not the slightest doubt that Powell will resist this line of attack as firmly as he has resisted others to date,” Guha said.
While it remains to be seen whether Trump would fire Powell, the very suggestion that he might could send jitters through markets.
The Fed is a unique institution. Repeated affronts to the central bank’s independence could cause short-term mayhem and continued turmoil in the long-term.
It could create unnecessary distraction for other Fed officials as they debate monetary policy and undermine the credibility of the Fed — even after Powell is no longer Fed chair.
“The effort by Vought and Pulte to use the building project to undermine Powell is also unhelpful to those who might succeed him,” Guha said.
Jamie Dimon, chief executive at JPMorgan Chase, told reporters in a Tuesday conference call that moving to fire the Fed chair could have unintended consequences.
“The independence of the Fed is absolutely critical, and not just for the current Fed chairman, who I respect, but for the next Fed chairman,” he said. “Playing around with the Fed can often have adverse consequences, absolutely opposite of what you might be hoping for.”
