Financial markets have been rattled by former U.S. President Donald Trump’s increasing criticism of the Federal Reserve, with investors expressing concern over the central bank’s independence and its ability to manage inflation.
The volatility began after reports emerged that Trump had asked lawmakers whether he should dismiss Federal Reserve Chair Jay Powell. The U.S. dollar responded by dropping 1.2% against a basket of major currencies, though it later regained some ground following Trump’s reassurance that firing Powell was “highly unlikely.”
Despite this, market participants remain uneasy. Bill Campbell, a portfolio manager at DoubleLine Capital, commented, “Even after pulling back, there is an increased chance that Trump will fire Powell… you can see it in the markets.”
Adding to the uncertainty, JPMorgan Chief U.S. Economist Michael Feroli noted that while the immediate crisis may have passed, the situation is far from resolved. Goldman Sachs echoed this sentiment, pointing to a broader “risk-off” environment in U.S. assets, signaling broader concerns beyond monetary policy.
Mounting Pressure on the Fed
Trump’s attacks on Powell have taken two major forms. First, he has publicly called for aggressive interest rate cuts—up to three percentage points from the current 4.25%–4.5% range. The Federal Reserve has resisted such cuts, citing inflationary risks, particularly those stemming from Trump’s tariff policies.
Second, the Trump administration has targeted the Fed’s $2.5 billion renovation of its Washington headquarters. Russell Vought, director of the Office of Management and Budget, accused Powell of mismanaging the project, describing it as “grossly” excessive. Powell refuted the claims, stating that features like rooftop terraces and custom elevators had already been removed from the plans.
Desmond Lachman of the American Enterprise Institute compared Trump’s behavior to that of Turkish President Recep Tayyip Erdoğan, who has repeatedly removed central bank officials for resisting pressure to lower interest rates. Lachman warned that such moves undermine central bank credibility and economic stability.
Market Reactions and Inflation Expectations
Markets have responded swiftly to these developments. The yield on 30-year U.S. Treasury bonds—highly sensitive to long-term inflation expectations—rose above 5% this week. Break-even inflation rates, which measure the market’s expectations for inflation, also surged. Ten-year break-evens hit 2.4%, their highest level since February, up from below 2.1% in April.
Durham Abric, head of U.S. inflation at Citadel Securities, said part of the increase was due to growing expectations of a more dovish Fed under political pressure. “Tariff-induced inflation is another factor,” he added.
Mark Dowding, CIO of fixed income at RBC BlueBay, emphasized that market fears about central bank independence are a key driver of rising inflation expectations. “If Powell is ousted, the assumption is a new Fed chair will be selected to aggressively cut rates to align with Trump’s agenda,” he said.
Mike Riddell of Fidelity International reinforced this concern, noting that the increasing yield on long-term U.S. debt signals anxiety about the Fed’s future direction and its ability to remain an independent institution.
Looking Ahead
While Powell is expected to remain in his post until his term ends in May, the political pressure surrounding his leadership has created a cloud of uncertainty. Markets are now factoring in the possibility that a new, more politically compliant Fed chair could be nominated, raising concerns about the long-term management of inflation and interest rates.
The ongoing tension highlights the delicate balance between central bank independence and political influence—one that, if disrupted, could have profound consequences for economic stability and investor confidence in the U.S. financial system.
