Jerome Powell was appointed as Federal Reserve chair by Donald Trump in November 2017, during his first term as president. Trump's second term will see Powell's exit. The manner of this departure is uncertain, though.

Powell was reappointed by former president Joe Biden in 2022 and his second spell is due to expire in May, providing a natural endpoint.

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This is the most likely outcome, but very public criticism and wider political pressure could yet result in an early exit.

This would prompt an extreme market reaction and money managers need to be ready for such an eventuality.

The crux of the dispute is the Trump administration's view that inflation is under control and rates should be much lower already to stimulate the US economy and lower the cost of servicing America's ballooning government debt.

Intervention in global trade flows through the tariffs programme, recently followed by taking a stake in chipmaker Intel, show the Trump administration is not inclined to let the invisible hand of market forces act completely unguided and will back words with actions.

A Flourish chart

Monetary policy is also very much in his sights.

Powell's position so far, and that of the 12 members of the Federal Open Market Committee (FOMC) collectively, is that it cannot be sure inflation has fallen sustainably to a low enough level to cut rates, particularly in light of the tariff policies.

The first signs of a shift came late last month at Jackson Hole, with Powell indicating a softening labour market may take priority over further suppression of inflation. Markets are now expecting a quarter point cut at the September meeting but that may not satisfy Trump and his advisers.

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Trump has previously said he has considered firing Powell but subsequently walked back the comments. Whether he has the legal authority to do so appears unclear, though according to Powell the president does not have that power.

The third possibility is Powell himself deciding to walk away early. He may conclude his position is untenable without the support of the president and in the face of such heavy public criticism.

It is not only Trump that has undermined Powell, with other members of the administration including Treasury Secretary Scott Bessent also critical of Fed policy, albeit using considerably more diplomatic language.

The political pressure on Powell emanating from the White House was symbolised by the extremely awkward tour of the Fed renovation project he took Trump on in front of the cameras in July. The images were striking, and Powell's discomfort was very clear.

While the Fed chair is the figurehead and has a high degree of influence, policy decisions are voted on. Any government seeking to bend the Fed to its will needs a majority of the FOMC on side too. The recent firing of governor Lisa Cook by Trump ‘for cause' due to allegedly making false statements related to a mortgage could be viewed in this context.

Opponents argued that the firing was motivated by the fact she is considered an obstacle to the loosening of policy the government wants to see. Cook has refused to accept the decision and is going to court to argue it is unjustified and not within Trump's power to remove her.

Today (10 September) Trump's efforts to remove Cook have faced a set back after a federal judge blocked the move on the grounds that the president has not identified anything related to Cook's professional conduct or performance as a board member that would indicate that she is said board or the public interest "by executing her duties unfaithfully or ineffectively".

The decision could be appealed by now the path for the Trump-Cook saga to reach the Supreme Court is a growing possibility.

In a separate but related development, Trump also fired Erika McEntarfer, commissioner of the Bureau of Labor Statistics, on 2 August after employment numbers were found to be wrong and had to be revised down.

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His claim was that the numbers had been "rigged" for political reasons. Relatively strong jobs numbers had been one of the reasons Powell had cited when declining to cut rates.

As with many policies, Americans are split on the president's move, with 47% seeing the decision as correct and 53% viewing it as politically motivated and unjustified, according to the recent Harvard CAPS / Harris Poll.

The findings of the poll show how polarised America still is ahead of the November 2026 mid-term elections, which means interest rates and their impact on the US economy could make all the difference on polling day.

Whether Powell's apparent dovish turn at Jackson Hole was a result of this pressure or purely ‘dependent on the data' cannot be known with certainty, but the timing is eye-catching.

Underlying the individual story around Powell's role is a broader question on a resurgence of political influence over central banks, which has major implications for anyone managing money.

Alan Bartlett, CEO at Goodhart Partners, argued Trump will resist temptation to fire Powell, but expects big changes in how the Fed operates next year.

"The justification for actively firing Powell simply is not there," he said.

"In many ways, it suits Trump to blame Powell and deflect attention from other things. Powell resigning could actually be his worst nightmare. And even if Powell has had enough and would quite like to call Trump's bluff, it is likely ‘duty' would stop him from resigning. He is likely to get some great material for the book over the next nine months, as well."

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Bartlett warned the bigger challenge is to predict how the different candidates would react across the range of potential scenarios that resulted.

"Agreeing with Trump today that the US economy could cope with lower interest rates is different from permanently being Trump's puppet. It would be extremely difficult even for Trump to ignore bond markets if they spoke loudly enough," he continued.

Glenn Meyer, head of managed funds at RC Brown Investment Management, sees the situation as finely balanced, but leans towards Powell staying until his term ends.

"Despite having been made chair of the Fed by Trump, he has clearly lost faith in Powell and is frustrated he will not kowtow and cut interest rates to support Trump's need to reduce the interest rate bill on US government debt," he said.

Meyer highlighted how the president can only remove the chair of the Fed if he has cause, which has been taken to mean for "inefficiency, neglect of duty or malfeasance in office".

"Trump is more likely to shoot from the hip rather than be Machiavellian and set Powell up to fail. Yet it was only a short time ago Trump tilted at Powell over the costs of a refurb of the Fed's building in Washington.

"The president was self-evidently irked by Powell publicly challenging the president's estimate of the cost overrun, so while there is some potential for him to be removed in a fit of pique, I still consider it unlikely he will be forced out of office, not least because Powell is also chair of the FOMC, and so far as I know, the president has no jurisdiction over this committee," Meyer continued.

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"Without Trump having the ability to change the chair of both the Fed and the committee at the same time, Powell's position appears reasonably robust, as to have the chairs of these two committees working against each other would lead to chaos in markets."

Whether Trump resists temptation to fire Powell or not, change is certainly coming.

The next chair will be a Trump loyalist heading into the role with a clear brief to push for looser policy and stimulate the economy ahead of the 2026 midterms.

Markets love loose policy and higher levels of liquidity washing through the financial system, but only up to a point. Investors could quickly take fright at any signs of recklessness, given the risk of creating inflationary pressure.

Tina Fong, strategist at Schroders, also thinks Powell will complete his term, as the Trump administration will be wary of the likely market turmoil firing him abruptly would create.

"Investors are likely to expect the new chair to put pressure on the Fed to cut interest rates further and faster, but ultimately monetary policy will still be determined by consensus through the FOMC. Markets and investors will be watching closely for any signs of political influence on the Fed," she said.

"The big risk is higher inflation, with the US economy already running near full employment. Looser monetary policy now could come at the cost of higher interest rates later and a potential slowdown in growth.

"Market confidence in the Fed's commitment to fighting inflation would likely be reduced if investors believed it had become politicised," she continued.

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"This could lead to investors asking for higher term premiums. In turn, higher Treasury yields or increased bond volatility would put pressure on equity valuations."

The simple way to look at this is as time for full risk-on, with the likely liquidity expansion being the proverbial tide that lifts all ships.

There may well be a nasty inflationary sting in the tail further down the track, but by that time a lot of money will have been made.

Investing is never that easy though, of course, and inflation can spook markets well before it becomes evident in the data.

"The US consumes more than it produces," said Bartlett.

"Cutting interest rates and stimulating demand would worsen the trade deficit rather than miraculously increasing domestic production in the US. The primary reason Trump wants interest rates cut is because the cost of servicing the national debt is too high.

"The irony clearly is that confidence in the Fed, the dollar and the US economy is central to the price at which the world is willing to lend to the US. It is perfectly possible that markets could lose faith in the Fed's ability to make sensible long-term decisions. The downside risk to asset prices in that scenario is huge."

Bartlett added markets are always a contest between the "wisdom and madness of crowds".

Within equities, he is bullish on the opportunities created around AI and the business models evolving to address the demographic, security and environmental challenges that will shape the world for the coming decades.

"Economic, industry and market cycles are going to be shorter prospectively and this will create opportunities for agile investors. The current focus on Fed policy should be viewed in this context – the era of structurally declining interest rates is over. Understanding cycles is going to be critical to successful investing. Short term, valuations are concerning across most asset classes and markets," he said.

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"There are apparently as many as 11 candidates for the Fed job, but the successful one is very likely to be someone who can demonstrate unwavering loyalty to the president. So, in all probability, we can look forward to a period of interest rate cuts without full regard to the economic need for stimulus," added Meyer.

"Alongside this, expect foreign government selling of US Treasuries, repatriation of foreign owned US assets and a decline in the value of the dollar."

The RC Brown IM head of managed funds expects there to be continued reductions in weightings to both US bonds and equities.

"The US is too big an economy, with too much foreign money backing it, for this to be wholesale panic selling, but any new capital invested in the US is likely to be focused on areas that cannot be accessed in other geographies.

"Some technology and unique growth stocks undoubtedly will continue to appear attractive to those who can stomach increased levels of volatility, but overall, at the margin, US exposure is probably going to be more opportunistic rather than strategic," he continued.

"In this scenario, undervalued markets, such as the UK, and small- and mid-cap stocks in particular look relatively more attractive."

Turning to the implications specific to private markets, Nicholas Hyett, investment manager at Wealth Club, sees potential for renewed inflationary pressure to create some opportunities.

"In a world with rising inflation, real assets are particularly appealing, especially those with inflation-linked cash flows. Infrastructure investments fits that definition nicely – and is an area where private markets have a real edge," he said.

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"Infrastructure funds own things like toll-roads, gas pipelines and utilities – all crucial links in the global economic system where revenues are regulated, often non-discretionary and inflation-linked. Given the significant amount of debt used to build these assets, falling interest rates are also a positive, allowing assets to be refinanced at lower rates."

Hyett pointed out the underlying investments available in public and private markets are becoming increasingly similar, with the key difference being liquidity and the ability to sell at short notice.

"One thing worth bearing in mind, though, is that most private market funds have outsized exposure to the US, which is both a larger market with more investment opportunities and has been quicker to embrace the shift to private assets," he added.

"That means private market funds tend to be heavily exposed to the dollar, as well as the US domestic economy."

"It is often said if the US sneezes, the global economy catches a cold. In private markets, the cold could feel more like flu," Hyett added.

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What Trump’s Fed power grab means for portfolios