Trump Threatens $1.5 Trillion Market Crash if Fed Chair Powell Is Fired, Study Says

The Impact of Political Pressure on Financial Markets

President Donald Trump has frequently criticized Federal Reserve Chair Jerome Powell, even going as far as suggesting he could be fired. A recent study explores the potential consequences of such a scenario by analyzing how prediction markets and stock prices react to the possibility of Powell's dismissal. The research focuses on a critical two-hour window on July 16, when initial reports about Trump’s potential decision to fire Powell first emerged, followed by his denial.

What Happened on July 16?

Just before 11 a.m. on July 16, news broke that Trump had shown Republicans a letter justifying Powell’s removal. This claim was later denied by Trump. During the two hours between the initial reports and the denial, stock markets experienced significant declines. Prediction markets like Polymarket and Kalshi reflected increased odds of Powell being fired.

A paper published by Jérôme Taillard and Linghang Zeng from Babson College analyzed how these rising odds affected stock prices. They used this specific time frame to estimate the broader impact of Powell’s potential dismissal on stocks, bonds, and the U.S. dollar.

Market Reactions and Odds of Dismissal

On July 16, the odds of Powell being fired were around 25% according to the study. However, after the reports surfaced, these odds rose to 40% within 90 minutes. After Trump denied the claims, the odds dropped back to the mid-20s.

The researchers tracked the movements of the SPY ETF, which follows the S&P 500 index. As the odds of Powell’s firing increased, the SPY ETF saw sharp declines in value. Between 10:30 a.m. and 11:33 a.m., the ETF fell from $623 to $619.82. Based on this movement, the researchers estimated that the S&P 500 lost between $125 billion and $214 billion as the probability of Powell’s firing shifted by 17%. Overall, the stock market lost between $150 billion and $256 billion in value during this period.

Estimating the Broader Market Impact

If the odds of Powell’s firing were to increase from 0% to 100%, the researchers estimated that the market could lose between $880 billion and $1.51 trillion. This projection is based on the observed market reactions during the two-hour window.

Historically, stocks have risen when presidents, including Trump, have encouraged the Fed to take actions like lowering interest rates. However, Trump’s public criticism of Powell this year has been more intense than previous political pressures on the Fed. This has led to concerns among economists and financial executives.

Why Markets Are Concerned

The researchers noted that Trump’s shift from rhetorical pressure to the possibility of dismissal changed the dynamics of market expectations. While the prospect of near-term interest rate cuts could have positive effects, the uncertainty surrounding Powell’s potential firing introduced higher risks and reduced market confidence.

Key Takeaways

The study highlights the significant impact that political pressure can have on financial markets. By analyzing real-time market data, the researchers provide insights into how the credibility of central bank leadership affects investor behavior. The findings suggest that the potential dismissal of a key figure like Powell could lead to substantial losses in the stock market, emphasizing the importance of stability and predictability in monetary policy.