As tensions between President Donald Trump and Federal Reserve Chair Jerome Powell escalate, markets are bracing for what could become a historic clash over the future of U.S. monetary policy.
With Trump openly criticizing Powell’s handling of interest rates and even threatening to remove him before his term ends in 2026, investors are now forced to weigh the legal, political, and financial implications of a potential leadership shake-up at the Fed.
In this post, we explore the current state of the Trump–Powell relationship and what might happen if Powell is fired, and—critically—how it could ripple through key asset classes like interest rates, inflation expectations, FX, equities, credit spreads, and volatility. We will then run these scenarios through RiskSmart’s powerful stress testing engine to see how these can be quickly built and analysed.
Would Trump fire Powell?
Currently, markets are pricing in only 32% odds that Powell stays through May 2026. Since returning to office in January 2025, public tension has been escalating between Trump and Fed Chair Jerome Powell. Trump has repeatedly criticized Powell for keeping interest rates high amid persistent inflation (~2.7% as of June). Trump called Powell “dumb” and “too late,” floated the idea of removing him, and used the Fed’s $2.5 billion HQ renovation overruns as possible “cause”.
The White House lawyers warned that removing the Fed Chair on renovation grounds is weak, and the Supreme Court precedent shields Powell until May 2026. Markets have jolted at the talk over firing, with gold jumping ~$50/oz and stocks dipping.
Stress testing shows Powell’s removal is worst-case for Credit and Rates
Across all major assets classes, the knock-on impact of firing Powell would be profound – setting a new precedent for this administration and rattling investor confidence in the world’s largest capital market and creating huge uncertainty around monetary policy.
The following table presents a market summary of the potential impacts if Trump were to fire Powell. Additionally, we’ve included possible outcomes associated with his replacement candidates, assuming the transition is not carried out hastily.
- Interest Rates & Credit
- Volatility spike: Firing the Fed Chair would rattle the markets—Treasury yields could surge, with bond risk premiums widening, and credit conditions tightening amid monetary-policy uncertainty
- Forced tightening or looser policies? If a Trump aligned successor cuts rates aggressively, market distrust could push long-term rates higher, worsening debt service costs (~$2.5 T annual interest on ~$50 T debt)
- Inflation
- Upside risk: A politically driven rate cut could lift inflation expectations, weaken the dollar, and amplify imported inflation
- Foreign Exchange
- Dollar under pressure: Investors fear politicized Fed policy could erode confidence, weakening the USD. Broader de- dollarization trends (e.g., BRICS) could accelerate
- Equities
- Short-term green? Stocks might rally on expected rate cuts—but gains could be fleeting. Structural uncertainty may shock equity markets and raise equity risk premiums.
- Volatility & Risk Sentiment
- Market turmoil: Equity volatility (e.g., VIX) would spike, credit spreads widen—market pricing would factor in central bank instability
- Stress Testing Scenario
- With Powell being fired, initial moves in the market may be the selling of treasuries, yields spiking +50–100 bps, credit spreads widening, with further discussions over a rate cut, the dollar could drop 3–5% with inflation expectations set to rise with Fed credibility plunging.
Markets are watching Trump’s news with bated breath. Unthinkable just a year ago, it is imperative that investors stress test potential outcomes. We have been warned.
Modeling the immediate is important, but it is also crucial to think about the potential aftermath – who would succeed Jerome Powell? What would this mean for markets? We will tackle these questions and more in our next Trouble at the Fed blog.
Trouble at the Fed: Modeling Jay Powell’s potential successors
