Concerned about “firing Powell” disrupts the market, analysts analyze the asset impact in the three major scenarios

The Zhitong Finance App learned that uncertainty about Federal Reserve Chairman Powell's term is prompting investors to evaluate the market reaction that may be triggered if the Fed changes leadership early. US President Trump has repeatedly criticized Powell for not lowering US interest rates quickly enough. He often mentioned the possibility of removing Powell from office before the end of his term (10 months left), while also saying that his dismissal was “unlikely.”

Trump said on Thursday that he had a “good meeting” with Powell after visiting the Federal Reserve's Washington headquarters and visiting the renovation project site of two historic buildings criticized by the White House as being too expensive and wasteful. He said there was no need to fire Powell.

Investors have been considering all possible scenarios, including Trump's firing of Powell, the resignation of the Federal Reserve Chairman, or appointing a new candidate before Powell's term ends. Market participants said it is quite difficult to predict the impact of various outcomes on stocks, US dollars, and US Treasury yields.

However, last week's brief market turmoil — when there were reports that Trump was considering firing Powell — caused the S&P 500 index to drop 0.7% and the US dollar exchange rate to fall 0.9%, all providing some clues about possible market reactions.

Jack Ablin, chief investment officer at Cresset Capital, said: “The financial markets have sent clear warning signals about the consequences of political intervention.”

Fire Powell

Although considered the most unlikely scenario, the biggest risk to the market is Trump's firing Powell. Such a move would be viewed as an attack on the independence of the Federal Reserve, which is the foundation of the credibility that the market relies on.

Based on how volatile the market has recently experienced, Deutsche Bank strategists estimate that the dollar could fall by as much as 6%, which is probably the biggest drop on record. Deutsche Bank strategists estimate that 10-year US Treasury yields could rise by about 20 basis points, while 30-year yields could soar by 45 basis points. On Thursday, the 10-year yield was 4.413% compared to the 30-year yield 4.942%.

Although the new chairman of the Federal Reserve is more inclined to cut interest rates, the stock market may eventually look forward to it, investors say that if Powell is fired, the stock market may experience a sharp decline. Ablin said that the decline in the stock market would be greater than the fall of less than 1% triggered by last week's reports about Powell's impending dismissal.

David Seif, chief economist for developed markets at Nomura, said that firing Powell would increase the risk of Trump trying to control the Federal Reserve to a greater extent. Seif said, “The loss of the independence of the Federal Reserve will lead to a sharp increase in inflation uncertainty, which will prompt investors to demand higher returns to lock their capital in the Federal Reserve for a long time, leading to a steeper yield curve.”

Aaron Hill, chief analyst at FP Markets, said that gold could be an asset that would benefit from this situation. The price of this safe-haven metal is already close to the record high set this year at around $3,400 an ounce, and he expects its price to rise further.

Investors said they wouldn't distinguish whether Powell was fired for one reason or another.

Powell resigns

If Powell resigns, concerns about the independence of the Federal Reserve will continue, but the market may be able to avoid long-term uncertainty due to possible legal disputes. Powell has said that even if Trump asks him to leave office early, he will refuse to do so.

Analysts said that although this may cause the market reaction to be slightly stable in the short term, it will confirm concerns that the Federal Reserve is deviating from its dual mission of “achieving full employment and stabilizing prices.”

The Federal Reserve Chairman is just one of the 12 voting members in the monetary policy meeting. One of its responsibilities is to reach consensus with many policy makers. Benjamin Ford, a researcher at macro research and strategy firm Macro Hive, said, “I think it shows that Trump is willing to work so hard to disrupt the leadership of the board... if other members don't act in accordance with the basic practices of the new Federal Reserve Chairman, he will attack the entire committee, and I think this almost determines Trump's views on interest rates.”

The US dollar will be particularly vulnerable and will be hit by both interest rate cuts and loss of investor confidence. Ablin added: “If the Federal Reserve shows political compliance, it could trigger serious and long-lasting market turbulence across multiple asset classes and fundamentally change the global financial landscape.”

Shadow Chairman

For the market, the ideal outcome would be for Trump to appoint only a new chairman and keep Powell in office until the end of his term in May. US Treasury Secretary Bessent said on Wednesday that the Trump administration is in no hurry to nominate a new chairman to replace Powell. He said the government may announce a successor in December or January next year.

Mark Hackett, chief market strategist at Nationwide, said: “I don't think the stock market is bound to react negatively to this. Obviously, you'd think the next person would be more moderate in terms of average interest rate policy than Powell's, but I think this assumption already exists.”

A chairman who has publicly stated that he wants to lower interest rates could weaken the value of the dollar. “As we enter and transition to a new Federal Reserve Chairman, this appointment is likely to have an increasingly negative impact on the dollar,” Ford said.

Although this situation is not as extreme as the other two, the presence of a shadow chairman whose views on monetary policy may conflict with the current central bank leadership may cause confusion. Any choice deemed to be controlled by Trump could have a lasting negative impact on public perceptions of the independence of the Federal Reserve.

“It's so hard to pour toothpaste back into the bottle,” Hackett said.