Will Trump really fire Powell? Markets whipsaw with Fed independence on the line
With the Fed’s inflation credibility at risk, longer-dated bonds sold off on Trump’s threats.
Key takeaways
- Markets seesawed on reports that President Trump was getting ready to fire Fed Chair Jerome Powell, which Trump then denied.
- It’s the latest episode in a long-running conflict between Trump and Powell, whom the president has repeatedly criticized for not lowering interest rates.
- Trump removing Powell could dent confidence in the central bank and put upward pressure on longer-term inflation.
- Powell has emphasized that the Fed will maintain its independence and that he won’t step down before the end of his term in 2026.
The question of Federal Reserve independence is back on the front burner. Financial markets shuddered Wednesday after a White House official suggested President Donald Trump would likely fire Federal Reserve Chair Jerome Powell. Trump himself walked back the statement shortly afterward.
Stocks fell as investors digested yet another threat to the Fed’s independence, with the Morningstar US Market Index declining as much as 1.16% on Wednesday morning before making up lost ground after Trump’s denial. Meanwhile, longer-dated bonds sold off, sending yields higher, amid worries about higher inflation over the long term.
“The biggest outcome of the very public criticism from President Trump of Chairman Powell and ongoing ‘threats’ of removing him is the possibility of erosion of the Fed’s credibility and their policies,” says Morningstar Wealth chief multi-asset strategist Dominic Pappalardo.
Yield curve steepens on Fed anxiety
These concerns are evident in the bond market. Yields on the 2-year Treasury note fell from 3.97% to 3.87% during Wednesday trading. Meanwhile, yields on the 30-year Treasury bill spiked from 4.97% to 5.08%.
That’s not too surprising, according to Thierry Wizman, global FX and rates strategist at Macquarie Group. “You would expect the curve to steepen if Powell got bashed or fired.” Shorter-term yields jumped because markets view Powell’s eventual replacement as more likely to lower interest rates. But over the longer term, Wizman says this means “the Fed will pay less attention to its price stability mandate, and there might be more inflation.” More inflation means longer-dated bonds are potentially riskier and may offer less yield in the future. That leads to falling prices as investors demand a higher premium to compensate for that risk.
“The rise in longer-term yields was likely driven by concerns about resurgent inflation or lack of willingness for investors to want to hold longer-dated Treasury bonds, given the potential instability amid Fed changes and further political influence,” adds Pappalardo.
Trump and Powell on the rocks
Wednesday’s back and forth wasn’t the first time the Trump administration has threatened to push Powell out of his job. “There’s a long history of the president and the Fed Chair disagreeing,” says Strategas chief economist Don Rissmiller.
Trump publicly criticized Powell during his first term as part of his push for lower interest rates. He renewed calls for Powell’s ouster earlier this spring, and this summer, the administration suggested Powell misled Congress and mismanaged the funds used for a renovation of the Fed’s headquarters.
Fed independence at risk
The Fed operates separately from the rest of the federal government. The central bank is accountable to Congress, but it pursues its mandate of low, stable inflation and maximum employment independently.
“Most of the economic analysis supports an independent central bank, since that’s the best way to keep inflation expectations anchored,” Rissmiller says. A central bank perceived as susceptible to political pressure may be tempted to keep rates lower and increase the money supply to stimulate the economy. But that’s a risky proposition.
“Country after country has discovered that central bank independence is essential for flighting inflation,” James Angel, an associate professor of finance at Georgetown University’s McDonough School of Business, told Morningstar this spring. “When you allow politicians to control the money supply, they have a nasty habit of printing too much money.”
Powell has been adamant that the Fed will maintain its independence, even in the face of criticism by the executive branch. Fed officials have also stated that they will remain data-dependent when making monetary policy decisions, rather than follow a prescribed course of action. With inflation above its target and likely to worsen thanks to tariffs, the Fed has held interest rates steady in 2025 so far.
“Trump’s continued criticism does nothing to aid the Fed’s current conundrum of trying to prevent runaway inflation while supporting the economy, employment, and market liquidity amid heightened uncertainty,” says Pappalardo.
Rissmiller says runaway inflation isn’t likely in the short term, even if Trump does fire Powell. “The Fed’s process still requires a committee vote to change monetary policy,” he explains. “While the chair has a lot of influence, I’m not sure inflation expectations would become de-anchored right away … the system is set up to resist political pressure.”
A more muted market response
Financial markets bounced back on Wednesday afternoon, with stocks rising and longer bond yields falling off their intraday highs. “Much like we’ve seen with tariff headlines, market reaction to the Trump/Powell situation are less significant now than they were earlier in the year,” Pappalardo says. “Headline fatigue is real and widespread at this point.”
As investors have seen this year, announcements from the Trump administration on tariffs and other policies are often walked back or amended. Additionally, any attempted removal of Powell could be a lengthy process. “Clarity from the courts would likely be needed to resolve the issues in prior precedents,” wrote UBS analysts on Wednesday.