Trump's threats to fire Jerome Powell are unsettling the markets

We do not know if President Donald Trump will fire Jerome Powell from his job as chair of the Federal Reserve. We do know the financial markets do not much like the idea.

Trump's attacks on Powell for not reducing interest rates have "rattled financial markets," said the Financial Times. Investors are concerned about both the "central bank's independence" and its "long-term ability to fight inflation." Markets briefly tumbled last week amid reports that Trump would fire the Fed chair, then rebounded after he said he was "highly unlikely" to do so. There is still nervousness on Wall Street, however. There is clearly an "increased chance that Trump will fire Powell," said Bill Campbell, a portfolio manager at DoubleLine.

A Powell firing would likely lead to "higher long-term borrowing costs," said Axios. The Fed is currently seen as "removed from the day-to-day political maw." If the central bank comes under "more direct White House control," though, investors believe that the Fed's mission to rein in inflation will take a back seat to Trump's desire to cut short-term interest rates. Ironically, that would likely push up long-term rates. "Expect a period of volatility" if Trump follows through on his threats.

'Velociraptors testing the fences'

Trump knows he "can't just bust down the Fed's door" without triggering a reaction from Wall Street, said Allison Morrow at CNN. For now, markets are largely operating in "TACO mode," assuming that Trump will "chicken out" before making good on his complaints against Powell. The problem is that the president might decide to follow through on his instincts "even if they would be disastrous for the economy." For now, Trump and his team seem content to float trial balloons about Powell's job security "like the velociraptors testing the fences for weakness in Jurassic Park."

"One thing financial markets like is consistency," said George Washington University's Todd Belt to Newsweek. Firing Powell would introduce "chaos and unpredictability" into the economy, which would probably slow hiring and investment by American businesses. Investors are more confident when the Fed's economic policy decisions are "made based on data, not presidential whim," said Newsweek.

'A big quagmire'

Trump is "walking into a big quagmire," said Capitol Securities Management's Kent Engelke to MarketWatch. Firing Powell would be misguided, not just because of the market reaction, but because the job of the Fed chair is to act as a "spokesperson" for the entire bank. Powell's public comments reflect the "consensus view" of the Federal Open Market Committee that sets rates. If Trump wants lower short-term rates, then he would "also need to fire anyone else" on the central bank board who opposes his wishes.

Without Trump’s tariffs and trade wars, the Fed "would have already lowered interest rates," said Jared Bernstein, former chair of the Council of Economic Advisers, at MSNBC. If Trump really wants interest rates to come down, he already has the power to do so by ending the trade war. The president "doesn't need to fire Powell. He can do that himself."