The Powell Exit Scenario: A Catalyst for a Steeper Curve and Dollar Selloff?

The political pressure on Federal Reserve Chair Jerome Powell has reached a fever pitch, with President Trump's relentless attacks and institutional challenges threatening to undermine the Fed's independence. While the Supreme Court has barred Trump from removing Powell before his term ends in May 2026, the White House's relentless campaign—from scrutinizing the Fed's $1.6 billion headquarters renovation to floating the idea of a “shadow chair”—has introduced unprecedented uncertainty into the policy outlook. For investors, this low-probability/high-impact event could trigger a seismic shift in monetary policy, reshaping the yield curve and currency markets. Here's how to position for it.

The Political Playbook: Why the Fed's Independence Is Under Siege

Trump's tactics blend public shaming, legal probes, and institutional leverage. His budget director, Russ Vought, has accused the Fed of “ostentatious” spending on renovations, while Trump's appointees to the National Capital Planning Commission aim to weaponize the scandal to erode Powell's credibility. Publicly, Trump has called Powell a “very stupid person,” demanding rate cuts to slash government debt costs—a move the Fed has repeatedly rejected as incompatible with its dual mandate of price stability and full employment.

The legal shield against Powell's removal has not deterred creative alternatives. Rumors of a “shadow chair” (e.g., Treasury Secretary Scott Bessent) to pressure the Fed into easing policies reflect the administration's desperation to influence rates. While such a move risks market chaos, the mere possibility underscores the fragility of the Fed's institutional authority.

The Fed's Dilemma: Super-Dove or Super-Stubborn?

If Powell were to resign—a scenario currently priced at just 14% on Polymarket—the White House would likely install a more pliant successor. A “super-dove” Fed would prioritize rate cuts to appease Trump, even at the risk of stoking inflation. Such a shift would upend the current policy trajectory, where the Fed has maintained rates at 2.5% despite slowing growth and trade war pressures.

The yield curve's current flattening (driven by long-term rate declines) could invert if the Fed hikes further. However, a Powell exit and subsequent dovish pivot would reverse this dynamic: short-term rates would drop sharply, while long-term yields might rise as inflation expectations rebound. The result? A steeper curve, rewarding investors who buy steepeners (e.g., long-dated Treasuries vs. short-dated futures).

Currency Markets: The Dollar's Tipping Point

A Fed pivot to easing would catalyze a dollar selloff. The greenback's recent resilience has relied on its status as a haven in a volatile global economy. But if the Fed abandons its hawkish stance, the dollar's safe-haven appeal would wane. Emerging markets and commodities could rally, but the bigger beneficiaries would be traditional safe-havens like the euro and yen.

Investors should consider shorting the dollar via inverse ETFs (e.g., UUP) or currency forwards. Pairing this with long positions in EUR/USD and USD/JPY (betting on appreciation of the euro and yen) offers asymmetric upside. Avoid EMFX carry trades, however: if the Fed's credibility erodes, risk-off environments could amplify losses in high-beta currencies.

Investment Playbook: Position for the Fed's Crossroads

1. Short the Dollar: The DXY's 2025 high at 98.5 could unwind if the Fed softens. Target 95 by year-end.
2. Buy Steepeners: Use futures contracts (e.g., TLT vs. SHY) or ETFs like STPP to profit from curve steepening.
3. Favor EUR/JPY: Both currencies benefit from lower U.S. rates and safe-haven flows. Avoid EMFX (e.g., BRL, ZAR) until policy clarity emerges.

Conclusion: A Risk-Adjusted Bet on Chaos

While Powell's early exit remains unlikely, the market's complacency (14% odds) leaves room for a surprise. Even a partial Fed pivot—say, a 25bp cut by year-end—could trigger a sharp re-pricing. Investors should treat this as a probabilistic opportunity: allocate 5-10% of portfolios to dollar shorts and steepeners, while hedging equity exposure to inflation and policy whiplash. The Fed's independence is a fragile pillar—its erosion could redefine markets for years to come.

Final advice: Treat this as a tail-risk trade. Protect profits if the yield curve steepens beyond 50 bps, and exit if the Fed reaffirms its hawkish stance.