If President Trump successfully removes Jerome Powell from the U.S. Federal Reserve, the market response could lead to a substantial collapse of the currency and bond markets. Deutsche Bank’s George Saravelos emphasizes that this situation is a major under-priced event risk. Evidence shows that a loss of central bank independence can lead to higher inflation expectations, lower real yields, and increased risk premia. Currently, Polymarket indicates a 19% chance of Powell being ousted before his term ends.
The empirical and academic evidence on the impact of a loss of central bank independence is fairly clear: in extreme cases, both the currency and the bond market can collapse as inflation expectations move higher, real yields drop and broader risk premia increase on the back of institutional erosion.
We believe the market reaction would be large. The removal of Chair Powell is one of the largest under-priced event risks.
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