President Donald Trump stated that he does not plan to fire Jerome Powell, yet he managed to present it as a threat.

Trump’s comments capped several tense hours that elevated his pressure campaign on the Federal Reserve chair to a new level and led to a brief market drop.

On Tuesday evening, he suggested to a group of Republican lawmakers to fire Powell. His assistant said Wednesday morning that he was likely to pursue this idea. Then the president publicly backed away from it – with one important caveat.

"I don’t rule anything out, but I think it’s very unlikely unless he has to leave due to fraud," Trump said on Wednesday, responding to a question about firing the Fed chair.

This was a hint at yet another front that Trump opened against Powell: increased attention to the reconstruction of the two main buildings of the Federal Reserve in Washington. The president and his allies say the project is overly lavish and significantly exceeds the budget, and also hint at financial misconduct.

All of this is related to Trump’s belief that the Fed is keeping interest rates too high, and this increasingly worries investors who tend to believe that politicians should leave central bankers alone rather than besiege them.

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Markets have grown accustomed to Trump’s verbal attacks on Powell, which have been an integral part of his rhetoric for years. On Wednesday, they briefly faced the possibility that words could turn into actions — and soon. The reaction was sharp: the dollar fell by more than 1%, and the yield on long-term Treasury bonds surged.

Markets tumbled when Powell's firing looked likely.

For about half an hour, the value of the American currency fell, and the yield on long-term bonds rose, before Trump signaled that no immediate action against the Fed chair was forthcoming.

After the president signaled a delay, these steps were largely reversed. The question now is how long this will last.

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Powell’s term as chair still ends next May, and Trump has begun searching for a successor. But he also makes it clear that he won’t put an end to the reconstruction issue anytime soon.

Powell called the reports about the project inaccurate and asked the bank's inspector general to review them.

It is unclear whether the president even has the authority to fire the Fed chair. Nevertheless, Trump says that when he met Tuesday evening with about a dozen Republican House members and polled them on the matter, nearly all expressed support.

With Trump, such conversations are often precursors. He tends to publicly experiment with ideas, polling aides and even crowds at rallies before moving forward with their implementation. It was reported that Trump waved a draft dismissal letter at a meeting, although he later denied it.

The next task for the burdened central bank is the prospect of three of Trump’s aides visiting the reconstruction site, which will draw renewed attention to the project. Office of Management and Budget Director Russell Vought, Deputy Chief of Staff James Blair, and Federal Housing Finance Agency Director Bill Pulte – one of Powell's loudest critics – are insisting on conducting their own special investigation.

"His time has come, and the president has made it clear he does not want him here," Pulte told Bloomberg Television on Wednesday, denying whether he personally drafted the letter of dismissal that Trump allegedly waved before lawmakers.

The pressure campaign is a one-sided fight, as Powell is limited in how publicly he can oppose the torrent of Trump’s criticism. Nevertheless, the Fed chair has his defenders.

The list essentially includes global financial markets. One theory is that the president was floating a trial balloon on Wednesday and was stopped by what he saw.

"We believe that Trump is testing the markets to see if he can fire Powell," wrote Anna Wong, chief economist for Bloomberg Economics in the U.S. "The sharp reaction seems to have convinced him to hold off on rhetoric about firing for now." But she predicts further escalation and warns that firing Powell would slow growth and increase unemployment and inflation.

Also on Wednesday, Senator Elizabeth Warren of Massachusetts, the leading Democrat on the Senate Banking, Housing and Urban Affairs Committee and a longtime critic of Powell, came to the Fed chair's defense. She dismissed the administration's attention to reorganizing the Fed.

"Leave me alone," Warren said. "No one will be fooled by this pretext to fire Powell. And the markets will tank if he does."

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