NEWS ANALYSIS: Investors fear Trump’s removal of Powell will spur inflation

New York — Investors are fearful of a deep hit to asset prices if US President Donald Trump attempts to fire Federal Reserve chair Jerome Powell, undermining confidence in the central bank’s ability to fight inflation and act independently.

That could hurt the already bruised dollar, under-pressure equities and send bond yields higher, market participants said.

The Fed’s credibility as the world’s most powerful central bank relies on its independence. Trump has criticised the Fed for not cutting interest rates quickly enough and if any subsequent chair were to be less inclined to raise rates when needed or to push for faster rate cuts, it could spur inflation.

“Were Powell to be removed, markets would almost certainly interpret it as an inflationary signal, potentially driving long-term interest rates higher and undermining the US dollar’s role as the world’s reserve currency,” said Elliot Dornbusch, chief investment officer at CV Advisors.

After Powell’s ousting, there would be “violent reactions in markets,” according to Jamie Cox, managing partner at Harris Financial Group. “Monetary policy is not a political tool,” he said.

Some of the effect has already been seen in asset prices, with the dollar sliding to a three-year low on Monday, stocks selling off with the S&P 500 now about 16% below its February peak and benchmark US Treasury yields up.

Longer-dated US Treasury yields rose on Monday. Removing Powell could worsen upward pressure on the so-called term premium — a measure of the compensation investors demand for the risk of holding long-dated bonds. Market inflation expectations, as measured by 10-year Treasury Inflation-Protected Securities and 10-year Treasuries, remained stable on Monday.

Trump said on Thursday that the Fed chair’s termination “cannot come fast enough,” though his term ends in May 2026.

White House economic adviser Kevin Hassett on Friday said Trump and his team were studying if they could fire Powell, while Trump on Monday said the economy could slow down unless rates were lowered immediately.

Investors said that they were starting to take the possibility seriously of an attempt to fire Powell, despite the barriers to do so. It is unclear if Trump would be legally allowed to remove Powell, who is appointed by the president but confirmed by the Senate. An effort by Trump to oust members of other independent agencies is now before the Supreme Court.

Some said that they were starting to expect more long-shot scenarios coming to fruition after the Trump administration’s tariff policies which were harsher than expected, causing volatility in asset prices. Since the April 2 tariffs announcement, the S&P 500 has fallen 9%.

“Previously I thought the odds were very much against Trump trying to remove Powell, but my confidence has faded,” Christopher Hodge, chief US economist at Natixis.

Andrew Graham, managing partner of Jackson Square Capital, estimates that the S&P 500 index would fall below 4,835 — an about 6% fall from its Monday close.

Jack Ablin, chief investment officer at Cresset Capital in Chicago, said if the president installs his own person at the Fed and the central bank lowers rates against a backdrop of rising inflation “we’d see a continuation of what we’re experiencing now”.

“Unfortunately, both stocks and the dollar are overvalued, which gives them room to fall more,” said Ablin, who thinks that the S&P 500 is 10%-15% overvalued. Through Friday, the S&P 500 was trading at 19.2 times forward 12-month earnings estimates, compared with its long-term average of 15.8, according to LSEG Datastream.

Replacement to Powell

Trump’s criticism of Powell has a long history. In 2019, the president called the Fed chair “an enemy.” But last year, following his election, he said he would not try to replace Powell.

Powell himself has said he has no plans to vacate the job before his term ends while also arguing that the central bank would wait for more data on the economy’s direction before changing rates, as tariffs could push inflation higher.

Trump could replace Powell with former Fed governor Kevin Warsh, the Wall Street Journal reported last week. Warsh for his part has said the Fed chair should conclude his term, the report added.

Capital Economics said if a well-qualified candidate is lined up, such as Warsh, then the initial market reaction “might not be disastrous” though it would likely be “the first step in dismantling the Fed's independence” as if it led to the remaining Fed board members being fired, that would “trigger a more severe market backlash”.

Some market participants consider an easier route for Trump would be to create a so-called shadow Fed chair, or someone investors would look to for guidance as opposed to Powell. Reuters