Markets Rattle, Then Recover, as "Trial Balloon" on Firing Powell Sends Jolt Through Wall Street

Markets were rocked Wednesday by a politically charged report from CBS News suggesting President Donald Trump was preparing to fire Federal Reserve Chair Jerome Powell—a move that would be legally murky and historically unprecedented. While such rumors have been swirling for months, the latest report added fuel to the fire by detailing Oval Office conversations in which Trump reportedly asked House Republicans for their opinion on whether Powell should be removed. According to multiple sources, Trump received enthusiastic support and indicated he was ready to move forward.

WATCH: Will Trump fire Powell? Infra Cap's Jay Hatfield discusses the potential outcome with AInvest.

The S&P 500, already under selling pressure after a sharp run-up, reacted swiftly to the news, plunging from a key weekly pivot level near 6290 to support around 6240. The move underscored how vulnerable equities have become to headline risk, particularly when monetary policy independence is called into question. But just as quickly as the market dropped, it snapped back after Trump, speaking from the Oval Office, denied the story outright—calling the firing of Powell “highly unlikely” unless there was fraud, effectively walking back the rumors.

This rapid fire sequence—leak, reaction, denial—is a textbook case of a political “trial balloon”: when a leader floats a controversial idea through unofficial or semi-official channels to gauge public, political, and market reaction without formally committing. In this case, the market backlash appeared swift and sharp enough to warrant a public walk-back from Trump, whose administration has been closely monitoring equity performance as a proxy for broader economic confidence.

While the S&P recovered the initial loss, the underlying message was loud and clear: the idea of firing Powell—especially “for cause” over a contested Fed building renovation—remains a red line for investors. The bond market, interestingly, remained relatively calm. The 10-year Treasury yield barely moved, holding just below the psychologically important 4.50% level. But should the trial balloon become something more concrete, that level could become a flashpoint for further volatility.

Powell, a Republican first appointed to the Fed Board by President Obama in 2012, was elevated to the chairmanship by Trump himself in 2017. At the time, Trump praised Powell’s intellect and consensus-building approach, saying he was “strong,” “committed,” and “smart.” But the relationship deteriorated as the Fed continued raising rates through 2018 and 2019. Trump publicly berated Powell, calling him a “numbskull” and “total stiff,” and even floated the idea of firing him during his first term—though legal experts argued that the Fed Chair can only be removed “for cause,” a term never tested in this context.

Trump’s renewed hostility appears to be tied not just to Powell’s reluctance to cut rates amid high inflation but also to a brewing dispute over the cost of renovating the Fed’s headquarters—something the administration now appears to be using as a possible pretext for a “for-cause” removal. Trump has alleged mismanagement, calling the project a “palace” and accusing Powell of overspending. On Tuesday, Florida Rep. Anna Paulina Luna posted on X that she was “99% sure firing is imminent.”

The CBS report, which detailed Trump’s Oval Office discussion with House Republicans, said he directly asked whether Powell should be removed, and that “almost all of them said I should.” Trump told reporters Wednesday that while he had discussed the idea, he remained undecided, stating, “I’m more conservative than they are.”

Meanwhile, some Republicans are reportedly meeting with Powell Wednesday evening to express support for the Fed’s independence. According to sources, members of the House Financial Services Committee want to reinforce the importance of keeping monetary policy insulated from political pressure.

Investors are right to be wary. History offers a sobering case study in Turkey, where President Erdoğan’s repeated firing of central bank governors—typically for refusing to cut interest rates—triggered extreme volatility. In March 2021, when market-respected governor Naci Ağbal was abruptly removed, the Turkish lira collapsed 15%, stocks tumbled, and bond yields surged. Confidence in Turkish monetary policy eroded, and foreign capital fled the country.

The fear, then, is not just that Powell could be removed—it’s that it would signal the beginning of a politicized Federal Reserve, where independence is sacrificed for short-term political goals. That perception alone can be destabilizing, particularly in an environment where inflation is still above target, interest rates are high, and investors are already navigating tariff uncertainty and geopolitical risk.

Markets had already been showing signs of exhaustion near recent highs. Wednesday’s sharp drop off the 6290 level confirmed that sensitivity. For now, Trump’s denial has cooled the fire, but investors will be watching not just equity indexes, but the 10-year yield for signs of stress. A move above 4.50% could signal that markets are starting to price in more than just rumors.

With Powell’s term set to end in May 2026, and legal precedent murky, the stakes are enormous. Floating the idea might help Trump gauge the political winds—but if markets begin to believe it’s more than a bluff, the consequences could come fast.