Political Pressure on the Fed Could Trigger Big FX Moves

Can Trump Fire Powell? FX Traders Brace for Impact

Tensions are rising again between Donald Trump and Fed Chair Jerome Powell. Trump wants lower interest rates and has criticized Powell for being too slow. Though Powell’s term runs until May 2026, Trump has hinted he might try to remove him early, claiming “cause” or “fraud.” Legal experts disagree on whether that’s possible—but any attempt could shake the dollar and global FX markets.

What Is the Federal Reserve and Why Is Its Independence Important?

The Federal Reserve (Fed) is the central bank of the U.S. It manages the money supply, sets interest rates, and aims to keep inflation low and jobs high. To stay fair and focused on the economy—not politics—it operates independently from the President. The Fed Chair, now Jerome Powell, is picked by the President but can only be removed for legal “cause.” This system helps protect the economy from political pressure, especially during elections.

Why Does Trump Want to Replace Powell?

Trump argues that Powell has been too slow in cutting interest rates. Lower rates typically boost borrowing, investment, and short-term economic growth—something Trump sees as key to strengthening the economy before the 2026 election. However, Powell’s caution reflects concerns about long-term inflation and economic overheating. Trump also criticized Powell over a $2.5 billion Fed building renovation, calling it wasteful.

Can a President Legally Fire the Fed Chair?

Under the 1913 Federal Reserve Act, the President can only remove the Fed Chair “for cause”—typically meaning serious legal or ethical misconduct, not just disagreements over interest rate policy.

Inside the Trump administration, views are split:

• The “Fire Powell” Camp argues that Powell’s past policy missteps, such as failing to catch the 2021 inflation spike or mismanaging a costly Fed renovation, could qualify as “cause.”
• The “Keep Powell” Camp, led by Treasury Secretary Scott Bessent, insists that “cause” must involve something much more serious—like fraud or abuse of power. They caution that removing Powell could shake market confidence and lead to both legal and financial turmoil.

If Trump did attempt to fire Powell and Powell resisted, courts would have to decide whether the dismissal was legally justified.

The Treasury Secretary’s Dilemma

Treasury Secretary Scott Bessent is in a difficult position. He currently supports Powell’s independence. But he’s also managing record levels of U.S. government debt. Lower interest rates make that debt cheaper to service—creating a temptation to support a Fed chair who favors rate cuts. If Bessent shifts sides and supports Powell’s removal, markets could see it as political interference. That could weaken the dollar and increase global volatility.

What Happens If Trump Tries to Fire Powell?

If President Trump attempts to remove Federal Reserve Chair Jerome Powell before his term ends in May 2026, the move could send shockwaves across global financial markets—from FX and U.S. equities to gold. Here are the most likely scenarios and what traders should watch:

Scenario 1: Powell Stays On

Markets interpret this as a win for central bank independence. Institutional trust is restored, reducing uncertainty.

• FX: The U.S. dollar may strengthen as confidence returns and interest rate expectations stabilize.
• Equities: U.S. stocks could rise on relief, especially rate-sensitive sectors.
• Gold: Likely to dip slightly as risk sentiment improves and the dollar firms.

Scenario 2: Powell is Fired and Refuses to Leave

A legal and constitutional crisis follows, likely escalating to the Supreme Court. This undermines trust in U.S. institutions.

• FX: The dollar could fall significantly as political pressure threatens Fed independence and inflation risks rise.
• Equities: Stocks may drop on legal chaos and fears of unstable policy direction.
• Gold: Safe-haven demand likely to rise as inflation fears grow and the dollar weakens.

Scenario 3: Powell Steps Down Quietly

Attention shifts to his successor. If markets see the new Chair as politically motivated, volatility rises.

• FX: The dollar may weaken as confidence in the Fed’s independence fades.
• Equities: Stocks could rally short-term on dovish expectations but face long-term risk if inflation rises.
• Gold: Gains likely, especially if inflation expectations rise and real yields fall.
  
  

Scenario 4: Shadow Fed Leadership

Trump doesn’t fire Powell but installs an informal advisor to steer policy decisions from behind the scenes.

• FX: Choppy dollar moves as traders struggle to interpret policy direction.
• Equities: High volatility persists, especially in rate-sensitive tech and growth stocks.
• Gold: Could see strong buying if market distrust in Fed messaging grows.

Political Pressure on the Fed Is a Big Deal for Traders

The showdown between Trump and Powell is more than political drama—it’s a potential flashpoint for global financial markets.

• The Fed’s independence underpins the dollar’s global strength.
• Any sign of political interference increases volatility and risk.
• Staying informed on legal developments and policy statements is key to navigating potential FX moves.
• In the end, if the “referee” of the world’s largest economy is seen as biased, markets will react—fast.