Markets hate it when the president threatens the Federal Reserve chair. Trump has criticized Jay Powell before, but yesterday’s comments were more intense. This came after Trump adviser Kevin Hassett said the White House would “continue to study” removing Powell. The reaction? Stocks fell, the dollar dropped, short-term bond yields fell, long-term yields rose, volatility increased, and gold prices spiked. Ugly stuff.
I don’t think Trump will actually try to fire Powell — maybe a 10% chance. That’s because doing so would directly hurt Trump’s own goals.
If Trump really did force Powell out before his term ends next May, it would be a disaster. The immediate market chaos and the longer-term economic damage from ending the Fed’s independence would seriously weaken Trump’s political position. That would make it harder to pass laws before the midterm elections — and could cost Republicans control of Congress. Some Republicans are already uneasy with Trump’s economic approach. He doesn’t have unlimited freedom to mess around.
(Side note: If Trump announces a new Fed chair, and that person starts making policy statements before officially starting, markets might see that as just as bad — or worse — than firing Powell.)
The risks are high, and the benefits are small. Wrecking central bank independence would hurt stock and bond prices long term because it would make inflation and interest rates more unpredictable. That’s true even if the new Fed chair made good decisions.
A new Fed chair would likely cut rates. That might help if tariffs are hurting growth more than they’re boosting inflation — but even then, the benefit would come at the cost of a damaging market shock. A recession could follow, canceling out the upside of lower rates. And if rate cuts are a mistake, inflation could rise and future rate hikes would be even more painful. Plus, firing Powell removes Trump’s ability to blame someone else if the economy stays weak.
All that risk — just to get a new chair a year early? Not worth it. I think Trump will see that.
(By the way, I said earlier that killing Fed independence would lower bond prices — but that’s not guaranteed. If the market gets really scared, bond prices could actually go up in a panic-driven flight to safety.)
I feel pretty sure Powell stays, but others disagree. A chief investment officer at a big wealth manager told me Trump probably won’t fire Powell because it would trigger capital flight out of the US. Still, Trump is angry and won’t stop talking, and markets will continue to react nervously.
Another strategist agrees:
“I’d say the odds are near zero. Look at Senator John Kennedy, a senior Republican on the Senate Banking Committee. He supported Powell over the weekend and backed Fed independence. That was a clear signal: firing Powell would be a disaster for the bond market and the dollar.”
But some see a real chance it happens. One top exec at a big quant fund thinks it’s 50/50 — and doesn’t believe it would matter much either way:
“Trump kind of wins no matter what. If there’s a recession, he blames Biden and Powell — fired or not. If the economy stays strong, he takes credit — fired or not. The talk alone is already moving markets more than the actual firing might. If it does happen, markets might bounce back quickly. The new Fed chair would matter more. The likely interim, John Williams of the New York Fed, suggests little would change.”
Another investment chief thinks it’s more likely than not:
“Trump has shown little respect for norms and acts out of revenge. I’d say there’s over a 50% chance he fires Powell.”
Either way, the damage is already being done. We’ll likely see continued pressure on the dollar, interest rates, and investment leaving the US. Foreign investors are losing faith and pulling back. Foreign direct investment relies on three key things: rule of law, political stability, and a reliable system for resolving disputes. Right now, the US is failing on all three.
More trouble may be coming — and Trump might figure that out eventually. Prediction markets currently show a 26% chance that Powell will be gone by the end of the year. I think that number’s too high.
