The stock market continues to hit new highs, but advisors would be wise to keep an eye on a deeply underappreciated risk: the potential end of Federal Reserve independence.
President Donald Trump’s long-running tensions with Fed Chair Jerome Powell are once again escalating. While much of Wall Street appears unfazed, strategists at Deutsche Bank are warning that markets are significantly underpricing the potential fallout from Powell’s removal—a move that could ripple through currency markets, Treasurys, and portfolio allocations alike.
Fed independence is a pillar of monetary stability, but that foundation could be tested. Russell Vought, a senior Trump administration figure, recently accused Powell of mismanaging Federal Reserve headquarters renovations and suggested he should be investigated. While that may sound like political noise, George Saravelos, global head of FX research at Deutsche Bank, cautions against brushing it off.
"Markets are currently assigning just a 20% probability to Powell’s removal this year," Saravelos said. "That low pricing belies the magnitude of institutional risk involved."
For wealth advisors and portfolio managers, the implications of such a move go far beyond the Fed’s leadership. Saravelos warns that the removal of Powell would likely trigger a sharp repricing across asset classes. He projects a 3%-4% drop in the U.S. dollar and a 30-40 basis point spike in long-term Treasury yields. Those moves would translate into immediate higher borrowing costs, upward pressure on inflation expectations, and potentially sustained volatility across duration-sensitive assets.
“This isn’t just a headline risk—it’s a structural threat to confidence in U.S. institutions,” Saravelos added. “The erosion of central bank independence would lead to higher risk premiums across the board.”
The timing of this risk is critical, particularly for RIAs managing fixed income and income-oriented strategies. The market is already navigating elevated Treasury issuance, growing deficits, and uncertainty around inflation’s path. A political challenge to the Fed could amplify all of those headwinds.
Saravelos pointed to the historical precedent of the 1970s, when President Nixon applied political pressure to then-Fed Chair Arthur Burns to keep rates low, helping to ignite a decade of stagflation. Today’s environment could be even more precarious. U.S. debt levels are significantly higher, global capital markets are far more integrated, and the dollar’s role as the world’s reserve currency makes any shock to monetary credibility a global concern.
“Investors are anchoring to recent equity strength and assuming the political noise around Powell is non-binding,” Saravelos noted. “But there’s no guarantee the market would absorb this type of institutional shift so calmly.”
For advisors, the most immediate consideration is portfolio positioning. A surprise leadership change at the Fed could throw interest rate expectations into chaos. Longer-duration bonds, rate-sensitive sectors like utilities and REITs, and dollar-denominated emerging market assets could all experience sudden volatility. Advisors with concentrated exposures in these areas may want to explore hedging strategies or reconsider duration risk.
In addition, the political uncertainty may necessitate more frequent client communication. “Clients need to understand that even in a strong equity tape, unseen risks are mounting,” one RIA CIO said. “This isn’t about market timing—it’s about reinforcing discipline and diversification.”
Even if Powell is not removed, Saravelos emphasizes that the threat itself introduces lasting uncertainty. “We would expect a persistent risk premium to emerge in both the U.S. dollar and Treasury markets,” he said. “Markets will become increasingly sensitive to incoming data and policy shifts—especially if investors perceive the Fed as politicized.”
The Trump-Powell dynamic is more than a clash of personalities. For advisors tasked with guiding clients through macro volatility, it’s a reminder that governance risk can be just as material as earnings or inflation. Saravelos concludes bluntly: “The removal of Chair Powell remains one of the most underpriced tail risks in the global financial system.”
As the 2025 election season approaches, this tension could become a more prominent part of the market narrative. RIAs should monitor developments closely, engage clients proactively, and prepare for a scenario where monetary policy loses its independence—and its credibility.
