Reviewing the "Fire Powell" Market Drill: What Did That One Hour Teach Us?

A rumor about Trump firing Powell triggered significant volatility in major market assets within just one hour, providing investors with a rare "stress test" that clearly demonstrated the potential financial shocks that could arise when the independence of the Federal Reserve is subject to political interference.

Wall Street Insight detailed the thrilling events of that hour. After the dismissal rumor surfaced, market risk aversion quickly intensified, leading to declines in U.S. stocks and the dollar, while assets like gold and Bitcoin rose. Less than an hour later, Trump denied the possibility, stating he did not intend to fire Powell but still hinted that "justifiable reasons" could be feasible. The market then promptly reversed its previous trend.

According to news from the trading desk, a research report released by Deutsche Bank on July 17 stated that this hour of "market rehearsal" provided valuable references for quantifying such political risks. It not only showcased the direct response path of the market but also provided a basis for projecting the broader and more profound market shocks that could occur if the risks materialized in the future. Based on the market reaction to this event, if the dismissal were to actually happen, it could lead to a nearly 6% plunge in the dollar in the short term, while long-term U.S. Treasuries could face a fierce sell-off, with the yield on 30-year Treasuries soaring by about 45 basis points.

The One-Hour Shock: How the Market Prices "Powell's Departure" Risk

During the approximately 60 minutes from the rumor's escalation to Trump's clarification, the market experienced intense turbulence. Deutsche Bank noted that during this period, predictive market data from Polymarket indicated that the probability of Powell being dismissed within the year surged by about 15 percentage points, briefly approaching a peak of 40%.

The market's reaction was almost instantaneous. Data showed that during this critical hour:

• Long-term Treasuries were sold off: Investors worried that a new Fed chair might adopt more accommodative policies under political pressure, leading to inflation risks, causing the yield on 10-year U.S. Treasuries to rise by about 5 basis points, while the yield on 30-year Treasuries surged by about 11 basis points.
• Short-term Treasuries were in demand: Due to investors betting that the new chair would align with presidential wishes to cut rates, the yield on 2-year U.S. Treasuries fell by about 5 basis points.
• The dollar came under pressure: Eroding confidence in U.S. assets led to a weaker dollar. The report indicated that the euro to dollar exchange rate rose by about 1.4% during this period.
• U.S. stocks declined: The S&P 500 index reversed from a 0.3% gain in the morning to a 0.7% loss.

Deutsche Bank's Quantitative Projection: If "Dismissal" Becomes Reality, Market Shock Could Amplify Fourfold

Deutsche Bank strategists presented a simple "rough calculation" in the report to project the comprehensive market shock that could result from Powell's formal dismissal. They believe that if a 15 percentage point increase in probability triggered the aforementioned scale of volatility, then when the probability of the event approaches 100%, its impact could be about four times that magnitude.

Based on this projection, the market could face:

• The 10-year Treasury yield rose by another 20 basis points.
• The 30-year Treasury yield surged by about 45 basis points.
• The 2-year Treasury yield fell by another 20 basis points.
• The dollar exchange rate may experience a significant decline of nearly 6%.

The report emphasizes that while this is a simplified estimate, it clearly outlines the enormous financial destructive power that could arise from challenging the independence of the Federal Reserve.

Legal Pathways and Structural Weaknesses in the U.S.

The market's violent reaction partly stems from investors realizing that there are real legal pathways for such political interference. Deutsche Bank analyst Matt Luzzetti pointed out in the report that under Section 10.5 of the Federal Reserve Act, the President has the authority to fill any vacancies on the Federal Reserve Board during Senate recess, and this "recess appointment" does not require Senate approval, although its term is limited. The report mentions that the next Senate recess is from August 4 to September 1, which could become a potential time window.

Additionally, the analysis by George Saravelos, Deutsche Bank's global foreign exchange strategy head, highlights the deep vulnerabilities in the U.S. economy. He believes that the U.S. is particularly sensitive to such shocks because it faces significant "twin deficits" (fiscal deficit and current account deficit) and a negative international investment position. These structural weaknesses mean that once investor confidence wavers, the risks of capital outflows and shocks to the dollar will be amplified.

Key Follow-Up: Unity Within the Federal Reserve and Inflation Outlook

Looking ahead, Deutsche Bank's report suggests that the ultimate impact of such events will depend on two key variables.

First is the response within the Federal Reserve. Whether the remaining Fed governors and regional Fed presidents will unite to defend the independence of the Federal Reserve will be a crucial cornerstone for stabilizing market confidence.

Second is the broader macroeconomic context. The report analyzes that if U.S. inflation is moderate and close to the Fed's 2% target at that time, the conflict between the White House's push for interest rate cuts and the Fed's policy mandate will weaken, potentially alleviating the market's negative reaction to some extent. Conversely, if there is forced intervention in monetary policy against a backdrop of high inflation, it could trigger more severe financial turmoil.

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Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk