The risk of Powell's departure increases, investors bet on long-term inflation rising and the steepening of the U.S. Treasury yield curve

According to the Zhitong Finance APP, U.S. President Donald Trump has repeatedly called for Federal Reserve Chairman Jerome Powell to resign, prompting investors to begin portfolio protection against rising inflation risks. The reason is that if a more dovish Federal Reserve comes to power, it may drive up prices, leading creditors to demand higher returns to hold bonds.

It is reported that bond investors are pricing in potential price pressures in the inflation market for the coming years. On Monday evening, the breakeven inflation rate reflected by U.S. 5-year Treasury Inflation-Protected Securities (TIPS) rose to 2.476%, a three-month high.

As criticism of Powell has escalated recently, the White House has begun investigating whether there are cost overruns in the renovation project of the Federal Reserve's historic headquarters in Washington. This inquiry has heightened concerns among market participants, who worry that the Trump administration may seek to remove Powell under the pretext of "for cause" dismissal—potentially the only legitimate way to achieve this goal. On Tuesday, the yield on U.S. 30-year Treasury bonds rose above 5% for the first time since late May. While investors are concerned about the massive fiscal deficit in the U.S., they are also assessing the risks associated with Powell potentially being forced to resign.

In the short term, a more dovish Federal Reserve may have mixed effects on the stock market, but it would mean a weaker dollar, increased volatility in the U.S. Treasury market, and rising long-term interest rates, leading to higher borrowing costs for mortgages and corporate bonds.

Since returning to the White House in January, Trump has repeatedly criticized the Federal Reserve led by Powell for not cutting interest rates, raising concerns that Trump's aim is to bring the Fed under his control. Even JPMorgan CEO Jamie Dimon issued a warning on Tuesday, stating that such actions could have unintended consequences and emphasizing that the independence of the central bank is "sacrosanct."

Some analysts point out that if market participants believe the independence of the Federal Reserve is being eroded, the volatility of financial asset prices could be very severe. One major risk is that investors will sell U.S. Treasuries, leading to an increase in long-term bond yields relative to short-term bonds.

Guy LeBas, chief fixed income strategist at asset management firm Janney Capital Management, stated, "If the market believes a politically manipulated Federal Reserve will cut rates to stimulate growth regardless of economic consequences, long-term inflation expectations will rise, leading to a steeper yield curve." "We cannot predict the exact magnitude of the market's reaction, but I think it could be very severe—30-year Treasury yields could rise by several percentage points, rather than just a few basis points."

According to the minutes of the Federal Reserve's meeting from June 17 to 18 released last week, most policymakers remain concerned about the inflation risks that Trump's tariffs could trigger, so almost no one supported a rate cut at the July 29 to 30 meeting.

Nevertheless, Trump has stated that Powell's resignation "would be a good thing." Although the president cannot fire the Federal Reserve chairman for differences in monetary policy, he and his administration have publicly called for Powell's resignation or pushed for rate cuts multiple times this month Truist Advisory Services Fixed Income Managing Director Chip Hughey stated: "In this scenario, short-term yields may decline due to the Federal Reserve accelerating interest rate cuts, but long-term yields are likely to be repriced upward due to more stubborn inflation expectations and an increasing term premium as institutional trust declines."