Once again, President Donald Trump demonstrated his power to shake up global financial markets. This time, by returning to one of his favorite topics: whether to fire Federal Reserve Chair Jerome Powell.
In an echo of the havoc that Trump unleashed with his trade war in early April, markets were briefly turned upside-down on Wednesday after a White House official said the president was likely to soon remove Powell.
Stocks, the dollar and long-term US government bonds quickly retreated, while short-term Treasuries rallied on speculation that whomever Trump appoints to replace Powell will bend to the president’s will and cut interest rates. Yet in less than an hour, the moves unwound after the president downplayed the possibility, saying he was “not planning” to fire Powell, someone he’s been lobbing almost daily criticisms at for moving too slow.
By most measures, the markets’ reaction was relatively muted, in no small part because of Trump’s penchant for bluffing — not to mention questions about whether a US president has the legal authority to actually remove a Fed chair whose interest-rate policy he dislikes.
But the message that markets sent was clear. To many, the initial moves reflected a deep-seated uneasiness that Trump will do what has long been unthinkable: That by firing Powell, he will end the Fed’s decades-long independence in setting monetary policy, and in the process risk stoking a surge in inflation.
“The markets are taking this as a credible threat,” said Joe Gilbert, portfolio manager at Integrity Asset Management. “This is unsettling and it remains to be seen if this is just a trial balloon by Trump to gauge market sentiment if indeed he follows through with firing Powell. Ultimately, we believe the legal hurdles will be too substantial to remove Powell.”
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To some observers like Wells Fargo macro strategist Erik Nelson, the reaction in major asset classes may convince the administration that firing Powell will not prove to be a panacea for the economy and markets.
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The yields on two-year Treasuries, one of the securities most sensitive to the Fed’s benchmark policy rate, declined as much as 8 basis points while the rate on the 10-year note trimmed a drop of five basis points. The Bloomberg Dollar Spot Index erased a gain of 0.2% to drop as much as 0.7%. The S&P 500, which was up as much as 0.3% early in the session, dipped as much as 0.7%.
Much of those knee-jerk moves quickly reversed after Trump made it clear that Powell’s firing was not imminent.
For some, like Bill Gross, the co-founder and former chief investment officer of Pacific Investment Management Co, the timing is less important than who is named to replace Powell.
“If he can sway the committee’s thinking over time, bond markets will increasingly go curve positive, the dollar will weaken,” he wrote in a post on X.
Many have expressed concern that even broaching the subject was potentially disruptive to the stability of US markets that have long relied on a central bank that is free from political influence. JPMorgan Chase & Co CEO Jamie Dimon said on the bank’s earnings conference call on Tuesday that the Fed’s continued independence is “absolutely critical” and meddling with the central bank “can often have adverse consequences.”
While Trump told reporters in the Oval Office that “no, we’re not planning on doing anything,” his comments left open the possibility of an attempt to oust Powell for cause. While Trump and his allies have lambasted Powell for most of the year over the central bank’s decision to hold interest rates steady, lately they have seized on the swelling cost of renovations to the central bank’s Washington headquarters. Asked Tuesday if the renovation price tag amounts to a fireable offense, Trump said: “I think it sort of is.”
“Just threatening to ‘fire’ him is a bad precedent,” said Kathy Jones, chief fixed income strategist at Charles Schwab & Co. “It sends the message that ‘Hey, I’m willing to break all precedent and cross that line to get what I want.’”
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George Saravelos, Deutsche Bank’s global head of FX strategy, said in a report over the weekend that if Trump were to force Powell out, the subsequent 24 hours would probably see a drop of at least 3% to 4% in the trade-weighted dollar, as well as a 30 to 40 basis point fixed-income selloff.
For now at least, the markets appeared to take Trump at his word that he wasn’t about to soon take action to replace Powell before his term is up next year. Yet investors were left gaming out the various scenarios that may unfold if he did.
“What does it mean for markets? Lower market confidence, more rate cuts priced, weaker USD and higher term premium,” Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc., wrote in a note. “Trump’s denial has stopped the pace of the move but folks now need to consider the possibility in the months ahead.”
Thierry Wizman, global foreign-exchange and rates strategist at Macquarie Group, added that “the first order of business for traders is to bet on a steepening yield curve in the US. From a more structural long-term perspective, it also means the Fed may pay less attention to inflation and be more fiscally-captured.”
Of course, for some veteran traders accustomed to the market whiplash that often accompanies conflicting news flow out of the Trump White House, it was just another day in the office.
‘You can go crazy if you try to trade around these headlines,” said Leah Traub, a partner and portfolio manager on the global rates team at Lord Abbet. “We stood pat.”
