If President Donald Trump removes Federal Reserve Speaker Jerome Powell from his post, a growing financial storm could clash with the US dollar and the Treasury.
According to Deutsche Bank, this scenario is grossly false and false by the market. If that happens, the fallout can be fast and brutal.
The warning comes from George Saravelos, the global head of Forex strategy who told clients that Powell was too unlikely to be banished despite the fact that Trump continues to raise the heat.
Trump has already made clear that he wants aggressive interest rate cuts, suggesting that he might name the alternative before Powell’s term ends. Meanwhile, Powell said he would not leave if the president asked. He admitted to rejecting costs associated with the renovation of the building, but said the allegations of the deception were “completely misleading.”
Powell’s exit hits the dollar and slams the bonds hard
Saravelos said the trade-weighted dollar could fall 3% to 4% within a day if Trump proceeded to eliminate Powell. He also hopes the Treasury will sell out, increasing 30-40 basis points to boost yields. This kind of hit loads a permanent risk premium into both assets.
He pointed to Polymarket, a crypto-based betting site, as it suggests that Powell’s removal is less than 20%.
But it’s not just about price. Saravelos said the global financial system would be shocked. Investors will see Powell’s removal as a blow to the Fed’s independence and will cast the institutions on what he called “an extreme institutional obsession.”
At the top of the dollar-based currency system, the Federal Reserve also manages exchange lines with other central banks. If these are politically contaminated, confidence in the Fed could collapse far beyond the US.
The market response after the initial shock will depend on whether other Fed officials defend the agency and what kind of person Trump chooses to succeed Powell. Saravelos also flagged the country’s vulnerable external funding position as a major risk. If Powell’s departure causes deeper panic, the dollar and bond market could suffer from even bigger and more chaotic moves than is currently forecast.
Traders ignore calendar red flags and customs noise
Powell’s position depends on balance, but investors are acting to make sure everything goes well. Stock is up. Bitcoin is gathering. The credit market is mild. The S&P 500 has increased by about 30% since its low in April during its last tariff panic. This year it hit eight record highs. But beneath the surface, things are changing.
The index was recently drawn back from the territory that was acquired. The sectors that were lagging behind are attracting attention, but those who fly are cooled down. Strategas Research said the worst 20% stake in the past year reached 6.2% on Friday.
Meanwhile, the top performers didn’t go anywhere. Cyclic stocks and tough credit spreads suggest that investors are less concerned about the recession. Even the City US economic surprise index has returned to positive territory.
Globally, the market looks strong. Nvidia hit a value of $4 trillion, but traders didn’t celebrate like they did when they exceeded $3 trillion last year. Renaissance macro studies said they felt market responses were more restricted.
The tariff threat from Trump’s team returned last week, but no one flinched. Unlike in the spring, traders now believe that only 25% of the S&P 500 revenues are exposed to tariffs, based on Deutsche Bank’s estimates.
A relaxed market stance can be dangerous. Powell stays, the economy avoids a recession and the AI boom continues to drive corporate spending. Not from 1998 to 1999, but the best case setup, and the market was closer to the bare, followed by the Tech-equipped Wildrary. The danger is that traders consider this clarity to be permanent. it’s not.
And then there’s the calendar issue. Data from the bespoke investment group show that S&P 500 returns tend to be weaker since July 15th. In 2024, the market surged in July and then sold hard. Soft CPI printing has encouraged hopes of reducing interest rates. The Nasdaq 100 was soaked, a small cap spiked and the hedge fund was forced to rewind the freight fare. The S&P lost about 6-7% and did not recover until after the election.