Deutsche Bank warns that markets are underestimating the risk of President Trump removing Federal Reserve Chair Jerome Powell. Deutsche Bank notes that financial platforms predict less than a 20% chance of Powell being dismissed.
If Powell is removed, the U.S. dollar could fall by 3–4%. Treasury yields might increase by 30–40 basis points within a day. Dismissing Powell may damage the perceived independence of the Federal Reserve. This could raise concerns about political interference in financial markets.
Potential Long Term Impacts
The market’s long-term reaction to Powell’s dismissal would depend on various factors. Trump’s choice of replacement, responses from other Fed officials, and the state of the broader economy would play key roles. Additionally, the U.S.’s weak external funding position could lead to greater market volatility. This might extend beyond the initial impact of Powell’s removal.
These discussions arise following Trump’s comments. He suggested Powell should resign if allegations about misleading Congress on Fed building refurbishments are proven. Powell has defended the Federal Reserve’s autonomy and has declared he would not resign at Trump’s request.
What we’ve seen so far is a stark warning from Deutsche Bank that traders may be overlooking a potential shock to markets—namely, the removal of Powell from his post. Currently, betting odds across the financial instruments suggest this outcome isn’t taken seriously. That matters because when traders price in a probability of only 20%, they’re essentially saying this isn’t a real threat, which may leave them flat-footed if it does happen.
Now, if the event were to occur, there’s a clear illustration of the immediate impact. The dollar, which typically reflects confidence in the country’s monetary direction, could slip markedly—by as much as four percent. At the same time, yields on Treasuries could spike roughly 30 to 40 basis points in only a matter of hours. That combination tells us what markets fear: that the central bank’s future decisions might no longer be purely data-driven but instead swayed by political intent. There’s no world in which that sits well with fixed-income investors or currency participants.
In recent history, any notion that a central bank is no longer fully independent has rattled foreign buyers. With the Federal Reserve, trust in its impartiality is a bedrock of the global financial system. Should that perception erode, overseas capital may retreat faster than anticipated. It’s precisely because of this that we must make space for sharper-than-usual moves in both long-end yields and the greenback.
Ongoing Volatility
Beyond the headlines lies a quieter, more latent threat—ongoing volatility. The sharp swings following such an announcement may not be a one-day affair. The reaction across markets will vary greatly depending on who is nominated next, how the remaining governors respond, and whether any follow-on resignations occur. Markets might need time to process the cumulative risk, and liquidity could dry up temporarily. That makes funding positions in any risk-on strategy more expensive and potentially more volatile over the medium term.
It’s worth noting that the U.S.’s current balance with the rest of the financial world does not offer a strong cushion. If investors begin questioning how politics is bleeding into monetary steering, appetite for U.S. assets could thin rapidly. We’ve seen before that once confidence weakens in the funding strength of the U.S., currency markets react aggressively—especially when combined with unpredictable policy.
This all sits against the backdrop of recent remarks made by Trump. He floated the idea that Powell should voluntarily step aside should certain allegations be verified. Powell, in turn, has reaffirmed his commitment to the institution and dismissed the idea of stepping down simply because he’s been asked to. That sets the stage for a possible confrontation that could shake the assumptions underpinning current rate markets.
So, in the sessions ahead, it would be wise to monitor positions that are dependent on rate stability or low volatility premiums. If a blindside event materialises, it may not offer time to realign. Medium-term trading strategies that rely on stable funding rates or narrow spreads may need a fresh layer of protection, especially if another leg lower in U.S. currency value adjusts embedded carry assumptions.
Expect recalibration to come quickly and from multiple corners of the market. We are likely to see it from credit, equity derivs and even from cross-currency swaps, especially in instruments exposed to dollar hedging costs. The signal here isn’t ambiguous: the market’s current pricing assumes a world where institutions remain untouched. But that assumption is not guaranteed.
