If Powell is really fired, how will the US economy and various asset prices move?

It is well known that after Trump took office, he has been pressuring Fed Chairman Powell to cut interest rates, even explicitly requesting a 3 percentage point reduction to lower the federal government's debt costs. However, Powell has ignored Trump completely and refused to lower rates under any circumstances. Despite Trump's various threats against him, including the threat of firing him (Powell's term ends in May 2026), he has maintained his position. Recently, Trump has once again seized on the Fed's renovation issue, claiming that there are problems with 2.7 billion dollars in funds and that he would investigate Powell. Yet, Powell remains steadfast and unyielding. His integrity is truly admirable.

On the evening of July 16, there were reports that Trump had drafted a document to fire Powell. But Trump later denied this. In the back and forth, the financial markets experienced significant volatility.

Figure 1 Dollar Index (July 16, 2025)

So, if one day Trump really fires Powell and replaces him with a yes-man as the Fed chairman, how will financial asset prices move? My judgment is:

1. When the command is just issued:

(1) US Treasury yields and the US dollar index immediately plummeted to reflect future rate cut expectations, leading to an immediate drop in the offshore RMB/USD exchange rate (i.e., RMB appreciates against USD).

(2) Accordingly, the prices of gold, crude oil, and even base metals immediately soared.

(3) The US stock market quickly dropped.

(4) The RMB/USD exchange rate plummeted, while international commodity prices surged. When converted to RMB, the fluctuations are not significant, meaning that the domestic commodity market (such as the futures night market) experiences little volatility.

2. Subsequently, the market realized that under the existing mechanism, the new chairman could not quickly and significantly drop interest rates.

However, the market will then realize that whether the Fed drops interest rates or not is not solely decided by the Fed Chairman. In terms of process, it requires:

1. The Fed will first revise the monetary policy framework. This is a complex project that cannot be done without a solid academic background from the new chair; and if there are no significant changes in the economic situation, there is no need to do it. This is actually the legacy that Powell will leave behind, which can prevent the new chair from making arbitrary decisions.

Even if the new chairman can propose a new policy framework, it also needs to prove to other Fed governors and even central banks around the world that this framework is better. This is very difficult and will take a long time.

2. To take a step back, even if the new chairman successfully revises the monetary policy framework, and this framework implies that a drop in interest rates is necessary, he still needs the FOMC to meet, allowing the members to vote on the timing, magnitude, path of the rate cut, and the interest rate targets.

Under normal circumstances, the Fed cannot drop interest rates by 3 percentage points at once without a liquidity crisis occurring. (In mid-March 2020, a small-scale liquidity strain occurred in the U.S., and on March 15, the Fed announced a drop in the federal funds rate to 0-0.25%, a reduction of 1 percentage point. This reminds us that if Trump wants to quickly and significantly lower interest rates, he might as well try to create a liquidity crisis to intimidate the Fed. But it's estimated that Trump doesn't have that much power.)

In short, the decision-making mechanism of the Fed determines that even if Trump's preferred new chairman takes office, they cannot recklessly cut interest rates immediately and significantly. When the financial markets realize this, asset prices will fluctuate in response:

(1) The US dollar index and US Treasury yields are rising, and the RMB/USD exchange rate is increasing;

(2) US stocks rose; see Figure 2.

(3) International commodity prices drop.

Figure 2: A diagram showing the trends of the US Dollar Index, US Treasury yields, RMB/USD, and US stocks.

3. Medium and Long Term

Furthermore, let's assume that this new chairman appointed by Trump is a master of political maneuvering, who can quickly bring most of the Fed's board into compliance through coercion and inducement, and then quickly drop interest rates by 3 percentage points. After a brief decline in U.S. Treasury yields and the dollar index, the whole world will think that the Fed has gone crazy and is messing things up, which will lead to turmoil in the U.S. economy: long-term economic overheating and serious inflation.

(1) After a brief plunge, the US dollar index will slowly strengthen; RMB/USD will rise accordingly (RMB depreciation); other currencies will also appreciate against the dollar first, then depreciate. Trump's underestimation of the dollar and desire to stimulate exports will come to naught.

(2) After the short-term plunge in U.S. Treasury yields, they will rise slowly. Trump's fantasy of lowering U.S. Treasury yields, thereby reducing the interest cost of federal debt, will be dashed. See Figure 3.

(3) The gold trend is uncertain. On one hand, the strengthening of U.S. bond yields is bearish for gold, while on the other hand, the increasing uncertainty in the future is bullish for gold.

(4) The US economy is overheating, leading to an economic bubble;

(5) US stocks, crude oil, and international commodity prices are rising. This indicates the emergence of an asset price bubble.

(6) However, in the long run, the bubble will inevitably burst. The economy will fall into a balance sheet recession, and the Fed will have to adopt zero interest rates or negative interest rates; the U.S. Treasury will have to significantly expand fiscal policy, resulting in higher federal debt. See Figure 3.

Figure 3 The new Fed chairman successfully drops interest rates significantly, affecting the US dollar and US Treasury yields.

This is the consequence of not respecting economic laws. To put it metaphorically, an elderly and frail person struggles to do certain things. At this time, slowly nurturing and exercising appropriately can prolong life. However, Trump demands that he be given tonics, injected with high doses of adrenaline, and supplemented with a large amount of Viagra to rejuvenate him. This kind of "artificial" revival will lead to his demise even faster.

Fundamentally, the capital marginal return rate determines the economic outlook, and only reform and innovation can improve the capital marginal return rate in the United States. Forcing a significant rate drop when it is not needed will only lead to a reverse "dead cat bounce."

Speaking of this, I am quite looking forward to Trump quickly firing Powell, appointing a new chairman, and rapidly dropping interest rates, after all, such a large-scale anti-intellectual economic experiment is really rare and hard to come by.