Federal Reserve chair Jerome Powell. — Bloomberg
New York: President Donald Trump’s potential dismissal of US Federal Reserve (Fed) chair Jerome Powell is a major and underpriced risk that could trigger a sell-off in the US dollar and Treasuries, a Deutsche Bank AG strategist says.
Trump said last week Powell should “resign immediately”, if allegations from an administration official that the central banker misled lawmakers over renovations to the Fed’s headquarters prove true.
The salvo added to mounting criticism of the Fed chair by Trump, who has demanded aggressive interest rate cuts and signalled he may nominate a successor before Powell’s term ends.
Powell has resisted pressure to ease monetary policy and said he won’t step down if asked by the president, given the Fed’s independence.
While acknowledging cost overruns related to the renovation work, Powell has disputed portions of reports about the issue and called them “flatly misleading”.
George Saravelos, Deutsche’s global head of foreign exchange strategy, said in a report to clients that the market is “pricing a very low probability” of Powell being removed from office.
He pointed to Polymarket, a betting platform, which assigned less than a 20% chance of it happening, and noted that the US dollar has been broadly stable recently.
If Trump were to force Powell out, the subsequent 24 hours would probably see a drop of at least 3% to 4% in the trade-weighted US dollar, as well as a 30 to 40 basis point fixed-income sell-off, Saravelos said.
The greenback and bonds would carry a “persistent” risk premium, he said, adding that investors may also grow anxious about the potential politicisation of the Fed’s swap lines with other central banks.
“Investors would likely interpret such an event as a direct affront to Fed independence, putting the central bank under extreme institutional duress,” Saravelos said, adding, “With the Fed sitting at the pinnacle of the global US dollar monetary system, it is also stating the obvious that the consequences would reverberate far beyond US borders.” — Bloomberg
