If Powell Is Completely Removed, the Dollar Could “Lose Its Aura”—Gold Even More?
Tensions between the White House and the Federal Reserve (The Fed) have shaken markets again following news of an investigation/threat of lawsuits against Fed Chairman Jerome Powell—issues many market participants have interpreted as political pressure on the central bank. The initial reaction is already visible: the dollar weakened, while gold surged to a new record as investors sought safe havens.
But the biggest question for investors now is: what happens if Trump actually succeeds in “removing” Powell through legal action? In that scenario, the market's focus will not only be on who will replace Powell, but also, more sensitively, whether the Fed's independence is perceived as ready for intervention. In the eyes of global markets, central bank independence is one of the foundations of confidence in the dollar and US assets.
Dollar: Potential for further weakness (at least initially)
If Powell is truly removed, the most likely initial reaction will be USD pressure. The reason is simple: investors will increase the “risk premium” for US assets if interest rate policy is perceived as more politically motivated. Reuters also reported that the dollar had been "wobbly" amid market concerns about threats to the Fed's independence.
In the next phase, the market could begin to question the dollar's role as a primary safe haven. The Financial Times mentioned the emergence of a kind of "debasement trade"—fear of the currency's value being eroded if the market perceives political pressure as driving interest rates too low or triggering long-term inflation—which is generally unfriendly to the dollar.
Gold: Strong prospects for continuation, but increasingly volatile volatility
For gold, the Powell ouster scenario tends to be bullish because two things are happening simultaneously: (1) institutional uncertainty is increasing (risk-off), and (2) the market could assess the likelihood of lower interest rates/risk of higher inflation. That's why, when the issue of pressure on the Fed escalated, gold had already surged to a record high of around $4,600/oz, according to Reuters and FT reports.
However, the path will not be smooth. Gold could rise quickly and then correct if there are signs of de-escalation (for example, a legal stall or a political compromise), or if US inflation data surprises and forces the market back to the idea of "higher interest rates for longer."
How investors see it: "This is serious," but the process isn't easy
In the investment community, there are two major camps. The first camp considers this very serious because it affects the Fed's credibility; the AP emphasizes that the Fed's independence is historically important for maintaining stability and controlling inflation, and attempts to politicize the central bank could unsettle the market.
The second camp believes the market remains relatively "calm" because it believes that removing Powell through legal channels will not be easy and could drag on in the courts. By law, members of the Fed Board of Governors (including the chairman) can be "removed for cause," but this "cause" standard is not clearly defined and has never been tested against the precedent of direct presidential removal, so the risk falls into the category of legal uncertainty.
Economists are also starting to speak out. Goldman Sachs chief economist Jan Hatzius warned that the threat of criminal charges against Powell could increase concerns about the Fed's independence—although he believes the Fed's decisions will remain data-driven.
What investors need to monitor (to avoid being "fooled by the noise"):
The direction of the legal process (whether it truly leads to removal, or is stuck in proving "for cause").
Signals for potential replacements (does the market view them as more "pro-rate cut").
US inflation data and interest rate expectations (because these ultimately move the dollar, yields, and gold).
Source: Newsmaker.id
