When U.S. President Donald Trump suggested firing Federal Reserve Chair Jerome Powell last April, stocks plummeted and the dollar cratered—investors saw it as violating the inviolable red line of central bank independence. Wall Street elites declared the notion "unthinkable," Powell emphasized legal prohibitions, and analysts universally extolled the sacrosanct status of Fed autonomy.
By July, a theatrical twist emerged. Trump waved what he claimed was Powell’s termination document before lawmakers, yet financial markets remained unnervingly calm. The S&P 500 lingered near historic peaks, while the dollar and bond markets stabilized after mere ripples of volatility. This eerie tranquility hints at two scenarios: either investors believe Trump would never truly breach the boundary, or the vaunted "red line" is theoretical dogma rather than financial reality.
Dangerously, only one test exists for this theory—and Trump edges closer to that precipice. Reports indicate Trump told legislators Tuesday night he planned to dismiss Powell over Federal Reserve headquarters renovation cost overruns, even brandishing a purported termination letter. Though he later called the odds "extremely low," America now teeters at a historic brink—the closest a president has come to igniting a constitutional showdown with the Fed.
George Saravelos, Deutsche Bank’s global head of FX research, warned days earlier that ousting Powell would constitute a "direct challenge to Fed independence," potentially triggering "simultaneous bond and currency collapse." Inflation expectations could skyrocket while risk premiums explode, cascading into catastrophe. Yet markets defied these dire forecasts with baffling composure.
Villanova School of Business professor Jonathan Doh notes investors now operate on reflex: when governments signal radical policies, they buy dips anticipating eventual dilution. Traders have bypassed panic altogether, automatically discounting Trump’s rhetoric—a profitable 2019 strategy that may veil gathering systemic storms.
While equities ignored Powell’s firing rumors, forex and debt markets flashed warnings. The dollar plunged nearly 1% on the news as gold and long-term Treasury yields surged in tandem.
Interactive Brokers chief strategist Steve Sosnick observed that "bond vigilantes"—whose pressure forced Trump’s April rate-hike retreat—remained oddly subdued. Equities’ numbness might signal something darker: rate-cut desperation now outweighs fear of political interference.
Sosnick posed a pivotal question: Did Tuesday’s leak test market limits? With muted reactions, Trump’s resolve to act could strengthen.