The Trump administration has intensified pressure on Federal Reserve Chair Jerome Powell to resign, raising serious concerns about central bank independence. President Trump has called for Powell to “resign immediately” and launched a multi-faceted pressure campaign that includes accusations about Fed headquarters renovation mismanagement. This development introduces a new layer of political risk for financial markets, with Treasury Secretary Scott Bessent confirming that “a formal process that’s already starting” to replace Powell. The outcome—whether Powell serves out his remaining 11 months or steps down early—could materially affect the US dollar, Treasury yields, and broader asset allocations. Financial advisors should prepare clients for volatility and consider potential shifts in monetary policy direction.
Legal and Political Context
While President Trump has stated it is “highly unlikely” he would fire Jerome Powell, the focus has shifted to pressuring Powell to resign voluntarily. Federal Reserve Chair terms are designed to insulate monetary policy from political interference, and the legal precedent for removing a Fed Chair is limited. Powell’s term runs until in May 2026, creating urgency around whether he will complete his tenure or step down under mounting political pressure. The administration’s strategy appears focused on making Powell’s position untenable rather than pursuing outright termination.
Why Central Bank Independence Matters
The independence of the central bank is essential for ensuring that monetary policy is trusted and effective. When the Fed operates free from political interference, it can focus on its long-term goals of controlling inflation and the labour market—even when those goals conflict with short-term political interests.
Why it matters for markets:
- Inflation Control: Independent central banks are more likely to raise interest rates to fight inflation, even if it’s unpopular. This maintains purchasing power and economic stability in the long run but may slow the economy in the short term.
- Credibility and Confidence: Markets trust that monetary policy decisions are based on data, not politics. This anchors inflation expectations and reduces volatility.
- Lower Long-Term Rates: When markets trust the central bank, risk premiums on long-term bonds stay lower, reducing borrowing costs for households and businesses.
Turkey and Argentina are examples where political control over central banks led to runaway inflation, currency collapses, and capital flight. Markets are now watching closely to ensure the U.S. doesn’t follow a similar path.
Scenario 1: Powell Stays On
Implications:
- Central Bank Independence Preserved: Markets retain confidence in policy continuity and inflation control despite political headwinds.
- Monetary Policy Outlook: The Fed remains data-dependent with Powell likely to maintain current policy stance through his remaining term.
- Market Reaction: Relative stability expected, though political noise may create periodic volatility. US dollar is likely to maintain its downtrend against most major currencies on the relative unattractiveness of US fiscal policies and Trump’s America First policies.
Investment View:
- Supports maintaining current duration positioning in fixed income portfolios.
- USD weakness over time favour non-USA equity allocations and emerging market exposure.
Scenario 2: Powell Resigns or Is Removed
Key Risks:
- Immediate Market Shock: Sharp US dollar depreciation likely as central bank independence concerns mount.
- Treasury Yield Volatility: Loss of policy credibility may push long-dated yields higher due to rising inflation risk premiums.
- Equity Market Disruption: Initial broad-based sell-off expected due to higher uncertainty.
Monetary Policy Impact:
- A Trump-aligned Fed Chair may pursue more aggressive rate cuts.
- Potential erosion of inflation-fighting credibility and increased long-term inflation expectations.
Investment View:
- Consider implementing US dollar hedging strategies in multi-asset portfolios.
- Increase allocation to non-USA assets, inflation-linked securities and real assets (commodities).
Likely Successors to Powell
Current speculation centers on several candidates, with Treasury Secretary Scott Bessent receiving significant backing from both inside and outside the administration:
- Scott Bessent (Treasury Secretary): Closest political alignment with Trump agenda, but markets view him as relatively pragmatic on monetary policy.
- Kevin Warsh: Former Fed governor known for advocating faster policy adjustment cycles and market-oriented approaches.
- Kevin Hassett (Director of the National Economic Council): Outspoken Powell critic with strong alignment to Trump’s economic philosophy.
- Christopher Waller (Current Fed governor): offers policy continuity, though considered politically unlikely given administration preferences.
The successor choice will signal the administration’s monetary policy priorities and significantly influence market expectations for future Fed behaviour.
Conclusion
Powell’s fate has evolved from a personnel matter to a significant source of systemic risk with tangible market implications. His continued leadership through early 2026 would help anchor market confidence in Fed independence, while his early departure could provoke substantial volatility and fundamental shifts in monetary policy expectations. Given that formal replacement processes are already underway according to Treasury Secretary Bessent, investors should remain highly alert to developments and be prepared to adjust client portfolios tactically if political uncertainty escalates further. The next few months will be critical in determining both the immediate market impact and longer-term implications for central bank independence in the United States.