Trump’s Fed Fight Is Just Getting Started

It’s one thing to bark at the Fed. It’s another to bend it.

Lately, U.S. President Donald Trump has returned to familiar ground, calling for aggressive rate cuts from the Federal Reserve and taking aim squarely at Jerome Powell. But unlike tariffs, where Trump can pull levers unilaterally, monetary policy isn’t his domain. And firing Powell, even if legally feasible, wouldn’t guarantee Trump gets what he wants.

That’s the catch: Trump can kick the hornet’s nest. But he can’t force the hive to fly his way.

A Power Move With More Resistance Than Reach

Trump’s criticism of Powell isn’t new, but the language has sharpened. Calling the Fed Chair “a major loser” in a public post rattled traders and reawakened fears about central bank independence. But here’s the nuance that matters for markets: Powell isn’t a solo operator.

The Federal Open Market Committee (FOMC) governs U.S. rate policy. And while Powell chairs both the Fed Board and the FOMC, the committee operates by majority vote. Even if Trump were to fire Powell, a move with shaky legal grounds, it wouldn’t automatically turn the Fed dovish.

As Capital Economics’ Paul Ashworth pointed out, Powell’s removal would only be the first domino. “If Trump is set on lowering interest rates then he will have to fire the other six Fed Board Members too.” That scenario would require a wholesale reshaping of the Fed’s structure, a move so radical it would likely spark a constitutional crisis and a market revolt.

The Legal Line Isn’t Clear And That’s the Problem

The president’s authority to remove a sitting Fed Chair isn’t well defined. Powell’s current term as Chair runs through next year, and while he’s technically a member of the Fed Board until 2028, early removal could end up at the Supreme Court.

There’s already precedent being tested. The Court is reviewing Trump’s prior dismissal of federal board members in unrelated agencies. If it sides with broad executive power, it could open the door to a future attempt on Powell’s job.

But even in that scenario, there’s no automatic win for Trump. JPMorgan’s chief U.S. economist Michael Feroli explained that most of the Chair’s authority is rooted in deference, not hard rules. That means the other members could simply vote around a replacement if they felt the integrity of the institution was at stake.

Wall Street Is Watching and Worrying

The financial markets don’t like games with the Fed.

In the past two weeks, U.S. bonds have seen a spike in yields, stocks have slipped, and the dollar has softened. The combination of tariff confusion and the potential politicization of monetary policy has raised inflation expectations, even before rate cuts are on the table.

Deutsche Bank’s Peter Sidorov framed the risk well: if Powell is ousted and replaced with someone seen as a puppet of the administration, the rest of the committee could dig in. That could lead to gridlock or pushback, ironically slowing any dovish momentum Trump is hoping to ignite.

And that’s the central paradox: the more Trump pressures the Fed, the more resistant it might become, both institutionally and reputationally.

Inflation Expectations Just Got a New Catalyst

Trump’s tariff policy has already been inflationary. Slapping 145% duties on select Chinese goods and threatening new ones on semiconductors and pharmaceuticals has injected cost-push inflation into the U.S. economy. Now, if Fed independence gets compromised, markets could price in an additional inflation premium, simply because they’ll doubt the Fed’s ability to act objectively.

JPMorgan, for example, warned clients this week that weakening the Fed’s autonomy could “add upside risks to an inflation outlook that is already subject to tariff pressures.” That’s not just a macro forecast, it’s a trading implication.

Expect more volatility in inflation-protected Treasuries (TIPS), gold, and long-dated bond yields. If traders believe the Fed is cornered, they’ll hedge accordingly.

Currency Traders, Pay Attention

This whole saga matters for forex, and especially for USD positioning.

If the perception builds that the Fed is under political pressure, the dollar may weaken, counterintuitively, even if rates stay elevated. That’s because currency traders price in expectations, not just outcomes. A Fed that’s seen as compromised loses credibility, and a loss of credibility often results in weaker currency flows.

It’s already playing out. The dollar index (DXY) has slipped to levels not seen since April 2022, and pairs like USD/JPY and USD/CAD are showing signs of fundamental divergence based on central bank outlooks.

If Powell holds firm, the dollar may find some relief. But if chaos escalates, especially if Trump follows through on threats to remove Fed governors, the greenback could slide further.

Final Thoughts

In the court of investor confidence, perception is everything. Trump may view the Fed as a political hurdle. Traders see it as the last bastion of macro stability. That’s why attempts to interfere, no matter how symbolic, rattle markets more than most policy headlines.

Whether or not Trump can fire Powell is almost secondary. The fact that it’s being discussed at all is a signal that institutional norms are being tested. And markets don’t wait for verdicts, they price in the risk right now.

For traders, this means staying agile. Expect more volatility in USD pairs, gold, and bond markets. And if the Fed starts sending coordinated messages to reassert its independence, don’t underestimate how hard it may push back.

Because when monetary credibility is on the line, the Fed knows one thing for sure:

It’s better to be late than to look weak.