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Podcast: (7 min)
Podcast: Investors Club: CIO’s Tan Teck Leng on our revised EURUSD forecasts and more (11 min)

Media reports have resurfaced this week that President Donald Trump is considering the removal of Federal Reserve Chair Jerome Powell, with sources indicating that a draft dismissal letter has been shown to Republican lawmakers. While the president has previously expressed dissatisfaction with the Fed’s interest rate policy, the president told reporters that while he had discussed “the concept,” he had not drafted a letter and was “not planning on doing anything” regarding Powell’s position. When asked if he ruled out removal, he said, “I don’t rule out anything, but I think it’s highly unlikely.” Senior officials, including Treasury Secretary Scott Bessent, have also publicly refuted the reports.

Financial markets responded to the initial headlines with a move into defensive assets such as US Treasuries and gold, while the US dollar weakened, and equities experienced brief volatility before stabilizing on Trump’s rebuttal. As of publication, prediction markets are pricing a roughly 21% probability that Powell will not remain in his role in 2025.

While we continue to view the probability of a change in Fed leadership as low, recent developments have prompted increased attention from both policymakers and investors. Although the situation remains speculative, we outline several considerations for global investors:

Potential implications of a challenge to Fed independence. A move to dismiss the Fed chair could raise questions about the long-term credibility of US monetary policy and the Fed's independence, which has historically been viewed as a key pillar of the financial system. This comes at a time when there are already concerns about US fiscal sustainability, inflation, and the dollar as a store of value. Such a development could prompt investors to demand higher risk premiums on US government debt, especially if it leads to greater uncertainty around inflation or interest rate policy. Aggressive rate cuts under political pressure might not lead to lower bond yields across the curve, as investors could begin pricing in higher inflation risks. Such developments might also have adverse implications for the US dollar’s role as a global reserve currency.

Legal and institutional considerations for a removal. While the president has the authority to initiate removal proceedings “for cause” against a Federal Reserve governor, the legal standards and their applicability to the chair remain subject to interpretation. No Fed governor has ever been sacked “for cause.” The framework for Fed independence, established by the 1951 Treasury-Fed accord, has endured previous political challenges. Any attempt to remove the chair would likely result in a protracted legal process, with recent Supreme Court decisions generally upholding the Federal Reserve’s institutional protections. Ultimately, the courts would determine whether the grounds for removal meet the legal threshold. There is potentially legislation that Congress could pursue, changing the Fed’s mandates or taking away Fed independence. It would be hard to get this through the Senate where 60 votes would be needed, but just an attempt to get it through the House could impact markets.

Policy implications: Committee structure matters. US monetary policy decisions are made collectively by the Federal Open Market Committee, rather than by the chair alone. Currently, only a minority of voting members have expressed support for rate cuts in July. Even if a new chair were appointed, the overall composition of the committee would remain largely unchanged in the near term, and Jerome Powell could continue to serve as a governor until 2028. FOMC members have sworn an oath to pursue the mandates established by Congress, so unless the labor market gets much worse, there is a limit to how much the Fed might cut even under a new dovish chair. Therefore, a change in leadership would not necessarily result in a material shift in policy direction. That said, the rotation of regional Fed presidents, existing governors, and governor Kugler’s forthcoming departure in January is set to shift the composition of voting members in a dovish direction in any event.

We will continue to monitor developments and market responses to any further news regarding Fed leadership. Chair Powell’s upcoming remarks will be closely watched for any indication of a shift in the Fed’s stance. Despite recent headlines, our base case remains unchanged: We expect the Federal Reserve to cut rates by a total of 100 basis points starting in September, with decisions guided primarily by labor market and inflation data. In this environment, we anticipate the US dollar will consolidate in the near term following its recent decline. We continue to view current EURUSD levels around 1.16 as consistent with our year-end target of 1.21. As rates fall, we see value in focusing on more durable sources of income, particularly through allocations to high grade and investment grade bonds. Gold would also stand to benefit from any uncertainty around Fed independence, as well as continuing investment and central bank demand and our expectation for lower real rates. We reiterate our forecast for prices near USD 3,500/oz by year-end.