If Trump Really Fires Powell, This Is THE Strategy To Help You Dodge The Market Turbulence

Trump's continued pressure on Federal Reserve Chair Jerome Powell has kept financial markets on edge. The turmoil has forced Wall Street to seriously consider what was once seen as an unthinkable threat—and take precautionary measures.  

On the 16th, global markets were rattled by reports that Trump might fire Powell. James van Geelen, an analyst at Citrini Research, immediately sent a macro trading alert to roughly 50,000 clients with a straightforward recommendation: "Buy 2-year U.S. Treasuries and sell 10-year notes." 

His reasoning? A potential new Fed chair would likely yield to Trump's push for lower rates, depressing short-term yields. Meanwhile, looser monetary policy—coupled with concerns over the erosion of central bank independence—could fuel inflation fears and drive up long-term bond yields. This scenario has been dubbed the "Powell Hedge."  

The Landscape Is Shifting

Even after markets briefly reversed on reports that the Trump administration was downplaying plans to oust Powell, van Geelen stood by his recommendation—and others followed suit.  

"We would have always assumed there is no basis for firing a US Fed chair and the US Fed has been immune from political interference," said Mark Dowding, Chief Investment Officer of BlueBay Fixed Income at RBC Global Asset Management. "There is a clear sense that this is now changing."  

For Dowding and many others, the ideal "Powell Hedge" aligns with their long-held positions—from bearish dollar bets to so-called "steepener trades," which profit from a widening gap between short- and long-term yields.  

They argue these trades are backed by solid economic and fiscal logic, from expectations of slowing U.S. growth to ballooning debt and deficits. Trump's threats against Powell only add fuel to the fire.  

Recent attacks on Powell have intensified, with Trump and his allies seizing on rising renovation costs at the Fed's Washington headquarters to ramp up scrutiny. Powell, meanwhile, has suggested that without Trump's tariff wars disrupting economic and inflation outlooks, the Fed would have cut rates this year.  

For Meghan Swiber, U.S. rates strategist at Bank of America, the "steepener trade" is a weaker hedge against Powell's potential ouster because the U.S. Treasury could curb long-term yield spikes by limiting long-dated debt issuance. The next quarterly refunding announcement is due July 30.  

Instead, Swiber recommends betting on higher breakeven inflation rates—the yield gap between Treasuries and inflation-linked bonds—as a "purer" hedge against Fed dovishness stoking consumer prices.  

The 10-year breakeven rate, reflecting inflation expectations, recently rose 3 basis points to 2.42%, nearing its highest since February.  

"We're seeing an inflation market pricing a premium around the Fed independence risk,"  Swiber said. "Ultimately, if you're putting pressure on the Fed in an environment where unemployment is low and we're still seeing inflation a far cry from the Fed's target, you ultimately have the market trading and perceiving more persistent upside risk to the inflation landscape."  

Some also see Powell's firing as just one piece of a broader risk puzzle.  

"The nightmare scenario is the Fed loses its independence, tariff inflation is big and the fiscal policy turns out to be more simulative ahead of mid-term election, and it's all happening at the same time,"  said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle, who is using options to bet on rising rate volatility from near three-year lows.  

Can Trump Actually Fire Powell?

Most on Wall Street doubt Trump can dismiss Powell for "cause" without facing legal hurdles.  

On prediction market Polymarket, traders now assign a 22% chance (up from 18%) of Powell leaving by 2025. Most surveyed expect him to serve out his term.  

"There's limited benefit of firing Powell now," said Noah Wise, senior portfolio manager at Allspring.  

Under the Federal Reserve Act, board members can only be removed for "cause." Whether the Fed's renovation cost overruns—Trump's main criticism—qualify as misconduct would be a novel question for U.S. courts.  

Therefore, the market reaction suggests Trump is unlikely to act.  

Within an hour of headlines about Trump possibly firing Powell—before his denial—the 30-year Treasury yield jumped 11 basis points, with its spread over 5-year notes hitting a 2021 high. The dollar fell over 1% against the euro, and stocks tumbled.  

Fed Governor Christopher Waller is a top contender. On the 18th, he hinted he'd dissent if the Fed holds rates steady in July, favoring a cut to support the labor market.  

In a recent survey, a third of respondents picked Waller as their preferred successor, followed by Treasury Secretary Janet Yellen.