Federal Reserve personnel earthquake triggers systemic risk in US debt

In July 2025, US President Trump publicly demanded the resignation of Federal Reserve Chairman Powell and hinted at the possibility of early replacement of the central bank leader, citing cost overruns (1.9 billion to 2.5 billion US dollars) in the renovation of the Fed headquarters. This political game around the independence of the Federal Reserve has sparked deep concerns among institutions such as Deutsche Bank about the stability of the US dollar system. Deutsche Bank warns that if Powell is forced to resign, the US dollar index could plummet by 3% -4% within 24 hours, and US bond yields could soar by 30-40 basis points.

Trump's offensive against the Federal Reserve began with a headquarters renovation project. White House economic advisor Hassett accused the Federal Reserve of pushing renovation costs from the budgeted $1.9 billion to $2.5 billion, with a 32% overspending and suspected of "luxury renovations". Although Powell acknowledges cost overruns, he emphasizes that the project involves security system upgrades and modernization, and denies any financial violations. However, this controversy has become a "breakthrough" for Trump's pressure - White House budget director Walter even demanded that Congress investigate whether Powell committed perjury during congressional questioning, attempting to construct a "legitimate reason" to break through the protection of the Federal Reserve's presidency.

Trump's motivation goes far beyond renovation costs. Since the beginning of 2025, he has repeatedly pressured the Federal Reserve to cut interest rates to stimulate the economy, but Powell insists on the principle of "data dependence" and maintains interest rates in the range of 4.25% -4.5%. This policy divergence, coupled with the risk of stagflation caused by Trump's high tariffs on the world, puts the Federal Reserve in a dilemma: if interest rates are cut, it may exacerbate inflation; if interest rates are maintained, it may suppress growth. Trump attempted to break the independence of the Federal Reserve and pave the way for aggressive monetary policy by replacing Powell.

Deutsche Bank's head of global foreign exchange strategy, Saravinos, pointed out that the market currently severely underestimates the risk of Powell being replaced. Although the gambling platform Polymarket shows a probability of less than 20% for this event, if it occurs, the US dollar and US Treasury bonds will face a "systemic shock". The sudden resignation of the Federal Reserve Chairman will be interpreted as a direct challenge to the independence of the central bank, triggering global investors to question the credit foundation of the US dollar. Saravinos predicts that the trade weighted US dollar index may fall by 3% -4% within 24 hours, breaking below the 94 level, marking the largest single day decline since March 2020. Investors will demand a higher risk premium to compensate for policy uncertainty. The yield of 10-year US Treasury bonds may jump from the current 4.4% to 4.8%, with the yield curve becoming steeper and exacerbating the debt pressure on the US government. Dutch International Group added that the euro, yen, and Swiss franc will further squeeze the international reserve currency status of the US dollar due to soaring demand for safe haven. The restructuring of the global trade chain and the rising pressure of imported inflation. There have been serious divisions within the Federal Reserve: hawkish officials warn that tariffs may push up core inflation and advocate maintaining high interest rates until 2026; Dove officials believe that the impact of tariffs on inflation is one-time, and companies can avoid price increases by internally digesting costs, advocating for interest rate cuts before the end of summer. Powell is trying to maintain a balance between the two factions, but Trump's intervention is destroying this fragile consensus. If Powell resigns, his successor may be forced to execute the president's interest rate cut directive, leading to the Federal Reserve becoming a 'White House monetary policy tool'.

Deutsche Bank warns that the US economy is currently in a "fragile external financing position," with a current account deficit of 4.2% of GDP and foreign holdings of over 30% of US Treasury bonds. If the credit of the US dollar is damaged, international capital may speed up its withdrawal, triggering a debt crisis in emerging markets: the reversal of the expected appreciation of the US dollar will push up the cost of debt repayment in the US dollar, and sovereign debt defaults may occur in Türkiye, Argentina and other countries; As an asset without sovereign credit risk, gold prices may exceed $3500 per ounce, and Bitcoin may be included in more central bank reserves due to its "digital gold" attribute; The EU, China and other economies may accelerate the promotion of local currency settlement, weakening the control of SWIFT system over cross-border payments.

The conflict between Trump and the Federal Reserve is essentially a confrontation between political power and economic laws. Historical experience has shown that the impairment of central bank independence is often accompanied by currency depreciation and uncontrolled inflation. Currently, although the market has not fully priced the risk of Powell's resignation, Deutsche Bank's warning has sounded the alarm: if Trump breaks through the Fed's independence red line, the US dollar system may face its biggest test since the collapse of the Bretton Woods system. Investors need to closely monitor the Federal Reserve Chairman's hearing on July 18th and the August 1st window for tariffs to take effect, as these two events may become key milestones in determining the fate of the US dollar.