What If Trump Fires Powell? Last Night, Financial Markets Rehearsed an “Earthquake Drill”

On July 17, Cailian Press reported that financial markets carried out a hypothetical exercise to evaluate the impact of a potential effort by President Trump to remove Federal Reserve Chair Jerome Powell. Although the immediate market reaction proved temporary, it nonetheless raised concerns.

The disturbance originated from a closed-door discussion between Trump and Republican legislators, during which he reportedly explored the idea of firing Powell. Once details emerged during the New York trading session, major assets responded negatively: U.S. equities, the dollar, and long-term Treasuries all declined. The ICE U.S. Dollar Index fell up to 0.8%, and the S&P 500 slipped approximately 0.6% intraday.

Bond markets delivered the most notable response. Investors anticipated that Powell’s replacement might act swiftly to lower rates, which pushed short-term yields down. Simultaneously, fears of inflationary risks, diminished Federal Reserve autonomy, and financial system instability caused a sell-off in long-term bonds, prompting yields on 10- and 30-year Treasuries to climb.
This movement resulted in an increased yield curve slope. The spread between 30-year and 5-year Treasury yields widened from 97 to 103 basis points.

Some investor reassurance came from Trump’s follow-up statement. He clarified that while the issue had been discussed "conceptually," there were no immediate plans to remove Powell. Legal challenges and opposition from Treasury Secretary Bessent were cited as likely deterrents.

Addressing the matter from the White House, Trump stated: “I’m not ruling anything out, but I think it’s very unlikely—unless he [Powell] must resign due to fraud,” while also criticizing Powell over renovation expenses.

By session’s end, markets recovered. The S&P 500 rose 0.3%, the dollar reduced its losses to 0.2%, and the 10-year Treasury yield returned to roughly 4.45%. Nonetheless, market observers remain uneasy about the broader implications. Some analysts believe Trump could still pursue Powell’s removal, even though a Supreme Court decision in May suggested such a move would be blocked. Since June, prediction markets have reflected growing expectations of a dismissal attempt.

On July 17, data from the Polymarket platform showed the probability of Powell being dismissed this year reached 24%—the highest recorded since the wager was introduced. The Federal Reserve’s independence is viewed as fundamental to U.S. financial stability. If that perception erodes, it could severely weaken the dollar and government bond markets, with broader economic repercussions and potential damage to global credibility.

Trump’s repeated criticism of Powell and calls for aggressive rate cuts have already contributed to persistent currency volatility. According to portfolio manager George Cipolloni, this trend should serve as a serious warning to both investors and policymakers.

Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, noted that Trump appears intent on lowering interest rates and sees Powell’s removal as one possible route. Yet most market strategists argue that such action would undermine the Fed’s independence.

Marco Vailati, who leads Research and Investment at CASSA Lombarda, added that even the threat of interference can provoke market instability by undermining confidence in central bank neutrality. If political influence over the Fed becomes widely suspected, the dollar’s status as the reserve currency could be questioned.

Concerns over the Fed’s autonomy might incite another wave of U.S. asset sell-offs, similar to those observed in April. Lee Hardman, Senior Currency Analyst at MUFG, stated that Powell’s dismissal would deeply damage investor trust in the dollar. He indicated that while uncertainty persists, signs of capital flight are already emerging and could intensify if Trump proceeds.
Hardman also pointed out that any removal attempt would likely face legal opposition. Even if blocked, the fallout from such uncertainty could be enduring—reinforcing MUFG’s negative outlook on the dollar.

Francesco Pesole, Foreign Exchange Strategist at ING, emphasized that perceived erosion of central bank independence could jeopardize the dollar’s global role. He argued that political pressure on the Fed would make holding U.S. currency less attractive.

A weakened perception of Fed independence may also ripple across the bond market. On July 16, yields on 30-year Treasuries climbed above 5% for the first time since May. While previously viewed as a ceiling, that level may now represent a floor—especially if Trump pursues Powell’s dismissal or revives tariff policies as suggested recently.

Cipolloni warned that undermining trust in Treasuries could have far-reaching consequences for financial markets and consumer borrowing. He added that should long-term yields rise to 5.5% or 6%, bond investors might push back—testing the limits of fiscal leadership. Equities would likely suffer as well.

Stock markets, especially after recent highs, may also be exposed. The Nasdaq Composite reached another record on July 17, led by gains in technology shares. Benson Durham, Global Head of Policy and Asset Allocation at Piper Sandler, noted that while bond markets are the focus, equity markets should not be ignored in assessing the fallout.

Senator John Kennedy of Louisiana warned that Powell’s removal could trigger a stock market crash. He further argued that if Powell were pressured into cutting rates by 300 basis points, bond markets might become chaotic, resulting in higher yields and greater challenges for government financing.