Global markets are bracing for potential upheaval following comments from President Donald Trump that suggest he may consider removing Federal Reserve Chair Jerome Powell. This unprecedented move could lead to significant volatility in the US dollar and government bonds, according to analysts.
On March 13, 2024, the US dollar index, which gauges the dollar’s strength against six major foreign currencies, fell as much as 0.8% amid reports of Trump’s escalating frustrations with Powell. The decline followed CBS News coverage indicating that the president was contemplating the removal of the Fed chair. However, Trump later downplayed these speculations, stating, “We’re not planning on doing anything,” while adding that it is “highly unlikely” he would fire Powell unless there were grounds for fraud.
The dollar index partially recovered after Trump’s remarks, reducing its losses to 0.3% by midday. The independence of the Federal Reserve is crucial for maintaining stability in US financial markets. Any perception of diminished independence could trigger a sharp sell-off in the dollar and US government bonds, potentially harming the economy and the nation’s global standing.
Trump has criticized Powell for not lowering interest rates, asserting that such a move would support economic growth. Yet Wall Street maintains that the likelihood of the president actually attempting to oust Powell remains low, primarily due to legal complications and concerns among his administration. Greg Valliere, chief US policy strategist at AGF Investments, noted that while Trump desires lower rates, firing Powell could signal a loss of Fed independence, which could alarm investors.
Market Reactions and Predictions
According to George Saravelos, global head of FX strategy at Deutsche Bank, Powell’s potential removal represents “one of the largest under-priced event risks” for markets. He predicts a possible drop of 3% to 4% in the dollar’s value if such an event were to occur. Saravelos emphasizes that a loss of central bank independence could lead to a broader market crisis, as inflation expectations rise and real yields decline.
Traders on Polymarket have assigned a 24% probability to Trump’s potential removal of Powell, the highest percentage since the bet’s inception. This indicates a growing concern among investors about the president’s intentions and the possible consequences for US financial stability.
Implications for US Financial Stability
An attack on the Fed’s independence could lead to a significant flight from US assets. Francesco Pesole, an FX strategist at ING, highlighted that the strength of the dollar as a reserve currency relies heavily on the perception of an independent Federal Reserve. Any indication of political interference could diminish the incentive for markets to hold dollars.
The bond market is also at risk, with the 30-year Treasury yield surpassing 5% for the first time since June 2023. Sustained increases in yields could reflect market pushback against Trump’s rhetoric toward Powell. Krishna Guha, vice chairman at Evercore ISI, expressed skepticism that Trump would proceed with such a drastic act, citing potential warnings from his own Cabinet about the chaos it could unleash.
The ongoing criticism of Powell’s management of the Fed’s renovation project has raised questions about the legitimacy of any potential dismissal. As Trump and senior officials, including Russell Vought and Bill Pulte, ramp up their critiques, the situation becomes increasingly complex.
Despite the uncertainty, market analysts believe Powell remains secure in his position. Jamie Dimon, CEO of JPMorgan Chase, underscored the importance of Fed independence for future leaders of the central bank, warning that tampering with it could yield unintended consequences.
The Federal Reserve’s credibility is vital not just for current economic stability but also for the institution’s long-term reputation. The potential fallout from any challenges to its autonomy could create ongoing turbulence in both domestic and international markets.
As the situation unfolds, investors and market watchers remain alert, fully aware that even a mere suggestion of change at the Federal Reserve could lead to significant market reactions.
