"Firing Powell" concerns disrupt the market, analysts analyze asset impacts under three scenarios

According to the Zhitong Finance APP, the uncertainty surrounding Federal Reserve Chairman Jerome Powell's term is prompting investors to assess the potential market reactions if the Federal Reserve were to change leadership early. U.S. President Donald Trump has repeatedly criticized Powell for not lowering U.S. interest rates quickly enough. He often mentions the possibility of ousting him before Powell's term ends (in ten months), while also stating that firing him is "unlikely."

On Thursday, Trump stated that after visiting the Federal Reserve's Washington headquarters and touring the renovation site of two historic buildings criticized by the White House as overly expensive and wasteful, he had a "good meeting" with Powell. He said there was no need to fire Powell.

Investors have been considering various scenarios, including Trump firing Powell, Powell resigning, or appointing a new candidate before Powell's term is set to end. Market participants indicate that predicting the impact of various outcomes on stocks, the dollar, and U.S. Treasury yields is quite challenging.

However, last week's brief market turmoil—when reports surfaced that Trump was considering firing Powell—led to a 0.7% drop in the S&P 500 index and a 0.9% decline in the dollar exchange rate, providing some clues about potential market reactions.

Jack Ablin, Chief Investment Officer at Cresset Capital, stated, "Financial markets have sent a clear warning signal regarding the consequences of political interference."

Firing Powell

Although considered the least likely scenario, the biggest risk to the market is Trump firing Powell. Such a move would be seen as an attack on the independence of the Federal Reserve, which is a cornerstone of the market's reliance on credibility.

Based on the recent volatility in the market, Deutsche Bank strategists estimate that the dollar could fall by as much as 6%, which could be the largest decline on record. Deutsche Bank strategists estimate that the yield on 10-year U.S. Treasuries could rise by about 20 basis points, while the 30-year yield could soar by 45 basis points. On Thursday, the 10-year yield was at 4.413%, while the 30-year yield was at 4.942%.

Although a new Federal Reserve chairman with a more dovish stance might eventually lead to positive expectations for the stock market, investors indicate that if Powell were to be ousted, the stock market could experience a significant decline. Ablin noted that the drop in the stock market would be greater than the less than 1% decline triggered by last week's reports of Powell's impending ouster.

David Seif, Chief Economist for Developed Markets at Nomura, stated that firing Powell would increase the risk of Trump attempting to exert greater control over the Federal Reserve. Seif remarked, "The loss of the Federal Reserve's independence would lead to a significant increase in inflation uncertainty, prompting investors to demand higher returns for locking funds with the Federal Reserve for the long term, thereby steepening the yield curve."

Aaron Hill, Chief Analyst at FP Markets, stated that gold could be an asset that benefits in this scenario. The price of this safe-haven metal is already close to the record high set this year, around $3,400 per ounce, and he expects its price to rise further Investors indicate that they will not distinguish whether Powell was dismissed for a specific reason or for other reasons.

Powell's Resignation

If Powell resigns, concerns about the independence of the Federal Reserve will persist, but the market may be able to avoid the long-term uncertainty that could arise from potential legal disputes. Powell has stated that even if Trump asked him to resign early, he would refuse to do so.

Analysts say that while this may lead to a somewhat stable market reaction in the short term, it will confirm concerns that the Federal Reserve is deviating from its dual mandate of "achieving maximum employment and stable prices."

The Federal Reserve Chair is just one of the 12 voting members in monetary policy meetings. One of their responsibilities is to reach a consensus with numerous policymakers. Benjamin Ford, a researcher at macro research and strategy firm Macro Hive, said, "I think this indicates Trump's willingness to undermine the leadership of the board so aggressively... If other members do not act according to the fundamental practices of the new Federal Reserve Chair, he will attack the entire committee, and I think this almost certainly confirms Trump's views on interest rates."

The dollar will be particularly vulnerable, facing a double blow from interest rate cuts and a loss of investor confidence. Ablin added, "If the Federal Reserve shows a politically submissive attitude, it could trigger severe and lasting market turmoil across multiple asset classes, fundamentally altering the global financial landscape."

Shadow Chair

For the market, the ideal outcome would be for Trump to appoint a new chair while allowing Powell to remain until the end of his term in May. U.S. Treasury Secretary Mnuchin stated on Wednesday that the Trump administration is not in a hurry to nominate a new chair to replace Powell. He mentioned that the government may announce a successor in December or January next year.

Mark Hackett, Chief Market Strategist at Nationwide, stated, "I don't think the stock market will necessarily react negatively to this. Clearly, you would think that the next person would have a more dovish inclination regarding average interest rate policy than Powell, but I think that assumption is already in place."

A chair who openly expresses a desire to lower interest rates could weaken the value of the dollar. Ford stated, "As we enter and transition to a new Federal Reserve chair, this appointment could have an increasingly negative impact on the dollar."

While this scenario is not as extreme as the other two, the presence of a shadow chair (whose views on monetary policy may conflict with the current central bank leadership) could create confusion. Any choice perceived to be under Trump's control could have a lasting negative impact on the public's perception of the Federal Reserve's independence.

Hackett stated, "It's very difficult to put the toothpaste back in the tube."