A topic that is rarely discussed but could significantly shake the markets - the possible dismissal of Powell by Trump.
Deutsche Bank has already called this an 'underestimated risk,' and there are reasons for that. Trump recently let his emotions run wild again and suggested that Powell should 'immediately resign' if accusations are confirmed that the Fed chief misled Congress regarding the expenses for renovating the headquarters. In addition to his old claims - that the Fed is not cutting rates enough. Powell himself, as is known, stands firm: he said he would not resign voluntarily and reminded everyone of the Central Bank's independence.
Deutsche believes that the market is not currently pricing in the scenario of Powell's removal. On Polymarket, the probability is only about 20%. The dollar remains strong. But if Trump decides to push for this decision, Deutsche expects within the first day:
🔹the dollar's decline by 3–4%
🔹a rise in Treasury yields by 30-40 bps (i.e., a sell-off of Treasuries).
And this is just the beginning. Investors will immediately start fearing the politicization of the Federal Reserve, especially its swap lines with other central banks. And the Fed is not just a local authority; it is the pinnacle of the entire dollar system. Therefore, cracks will quickly spread around the world. From here on out, everything will depend on:
🔸will other Fed members speak in support of independence?
🔸who will Trump propose to replace Powell?
🔸and what will generally be happening in the economy at that time.
And Deutsche separately reminds that the US is already in a vulnerable external funding position. So if the wheel starts turning, movements could be much larger than +4% in FX and +40 bps in bonds.
Interesting times lie ahead.
