Investing.com - Should U.S. President Donald Trump end up firing Federal Reserve Chair Jerome Powell, the initial market reaction "might not be disastrous," but that does not mean there is diminished risk from the move, according to analysts at Capital Economics.
In a note to clients, Paul Ashworth, Chief North America Economist at Capital Economics, said that Trump could lessen the effect of such an action by quickly lining up a "relatively-qualified" replacement for Powell, such as National Economic Council Director Kevin Hassett or former Fed member Kevin Warsh.
The possible hiring of Warsh, in particular, may not end up being "a full-blown disaster" markets, Ashworth added, although he said the U.S. dollar would likely be weakened and longer-dated bond yields could rise.
"The problem Warsh would face, however, is that he would have only one vote on what might end up being a hostile FOMC, making it impossible to force through the lower interest rates that Trump wants," Ashworth said.
The main averages on Wall Street all fell by more than 2% on Monday, as investors assessed remarks from the White House which seemed to suggest that officials were mulling possibly ousting Powell.
Trump himself has also hit out at the Fed leader, calling him a "major loser" and "Mr. Too Late" and arguing that he has not moved fast enough to slash interest rates to support the broader economy.
The Wall Street Journal has reported that Trump may be laying the groundwork to blame Powell for any economic weakness resulting from the president’s tariff policies.
Concerns have risen that should Trump fire Powell, whose term ends in May of 2026, jitters in financial markets -- which have already been shaken by Trump’s levies -- will intensify.
Ashworth said that the immediate impact from an ouster of Powell would mark just the "first step" in the "dismantling of the Fed’s independence."
"If Trump is set on lowering interest rates then he will have to fire the other six Fed Board Members too, which would trigger a more severe market backlash, with the dollar falling and rates at the long end of the yield curve rising," Ashworth wrote.