The Fed Chairmanship Gamble: Why Replacing Powell Could Backfire Spectacularly

The prospect of President Donald Trump firing Federal Reserve Chair Jerome Powell and installing a more politically pliant successor has sent shockwaves through financial markets—a scenario experts warn could trigger a self-inflicted economic wound. Analysts caution that such a move would erode the Fed’s hard-won independence, destabilize investor confidence, and potentially ignite a spiral of higher inflation, slower growth, and soaring borrowing costs. The stakes are monumental: the Fed’s credibility as an inflation-fighting institution underpins the dollar’s global reserve status, and its independence has been a pillar of U.S. economic stability for a century. Replacing Powell now, as tensions over trade wars and stagflation loom, could backfire catastrophically.

Market Instability: A Preview of What’s to Come

The markets have already begun pricing in the risks. Since Trump’s threats to Powell intensified in early 2025, the S&P 500 and NASDAQ have fallen sharply on days of escalating rhetoric, with the NASDAQ dropping 3.5% in a single session following Powell’s recent inflation warnings. . Meanwhile, the 10-year Treasury yield—a benchmark for long-term interest rates—has surged to 4.48%, reflecting investor fears of inflation and a loss of policy credibility. The U.S. dollar has also weakened, hitting a three-year low against the euro and pound, as global investors flee perceived political instability. .

Analysts at Raymond James warn that a Powell dismissal would mark a “significant near-term negative threat to markets,” with Treasury Secretary Scott Bessent reportedly urging Trump to avoid such a move. Michael Brown of Pepperstone predicts a “dramatic rush to the exit from U.S. assets,” including a collapse in Treasury prices and a “dollar falling off a cliff.” The fallout could permanently erode the dollar’s reserve currency status, as investors lose faith in the Fed’s ability to act independently of political pressure.

Economic Risks: Stagflation and the Fed’s Dilemma

At the heart of the crisis is the Fed’s dual mandate: controlling inflation while promoting employment. Trump’s tariffs, which have pushed inflation forecasts to 4% or higher, have left the Fed in a bind. Cutting rates in this environment could worsen inflation, while raising them further risks tipping the economy into recession. .

Joe Brusuelas of RSM warns that rate cuts in a stagflationary environment—where prices rise even as growth slows—would intensify capital flight into euros, yen, and francs. This, in turn, would drive up long-term U.S. interest rates, raising borrowing costs for consumers and businesses. Neil Dutta of Renaissance Macro, whose warning about a “spectacular backfire” anchors this analysis, argues that Trump’s focus on replacing Powell is a distraction: the real problem is his tariff policy, which has already triggered a “toxic mix of high inflation and slowing growth.”

Legal and Political Constraints: A Slippery Slope

Legally, Trump’s authority to fire Powell is highly constrained. The Federal Reserve Act allows removal only “for cause”—a threshold that Supreme Court precedent has interpreted narrowly. Even if Trump could legally oust Powell, replacing him with a figure like Kevin Warsh—a former Fed governor with a hawkish inflation bias—might not satisfy Trump’s demands. Warsh’s focus on price stability could mean no rate cuts, while markets would still view the Fed as politically compromised.

Senate resistance is another hurdle. Republicans, increasingly wary of Trump’s economic policies, might block a nominee seen as too pliant. Capital Economics notes that a politically appointed Fed committee could fracture over policy, worsening uncertainty. “Once markets see the Fed as a political tool,” says analyst Will Compernolle, “they’ll never trust it again.”

Historical Precedents: A Roadmap to Avoid

History offers grim lessons. The 1970s stagflation, exacerbated by Nixon’s interference in Fed policy, required brutal recessions to tame inflation. Similarly, Argentina’s repeated politicization of its central bank led to hyperinflation and economic collapse. Powell himself has drawn parallels to Paul Volcker’s 1980s resolve to crush inflation, vowing not to repeat Arthur Burns’ politically driven mistakes under Nixon.

The current moment mirrors these dangers. As the Fed’s credibility erodes, so does its ability to influence markets through communication alone—a tool that has grown increasingly vital as interest rates near zero. Without it, the Fed’s policy options shrink further, leaving the economy exposed to external shocks.

Conclusion: A Self-Inflicted Wound

The data is clear: replacing Powell risks a cascade of consequences that would directly undermine Trump’s economic goals. Market instability, higher borrowing costs, and a weaker dollar would amplify the pain of his own trade policies, while stagflation would cement slow growth and high unemployment.

The Fed’s independence has been a cornerstone of U.S. economic stability since 1913. To sacrifice it now, when inflation is already elevated and global confidence fragile, would be a historic miscalculation. As economist Kevin Hassett warned in his book The Drift, such a move would “savag[e] the reputation of the Federal Reserve”—a loss that could take decades to repair. For investors, the message is stark: a Powell dismissal is not just a political gamble, but an economic one—a bet that markets have already begun to reject.