Powell Dismissal Storm: Fed Independence Crisis Drives Gold Rally

 July 16 Political Shockwave Triggers Market Upheaval

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The most shocking financial news on the evening of July 16 was undoubtedly the rumor that President Trump might dismiss current Fed Chair Jerome Powell. This political storm not only undermined dollar credibility but directly propelled gold prices from a low of $3,318 to $3,371, while the dollar index failed at the 99 level and retreated below 98. Rising uncertainty promises to further fuel safe-haven demand.

This analysis objectively examines the relationship between Powell's policy stance and gold's surge, decoding the deeper market logic behind the flight to safety.

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Table of Contents

• Powell's Policy Stance: Fed Independence and Inflation Control
• Why Dismissal Rumors Triggered Gold's Breakout: Three Market Mechanisms
  • 1. Dollar Credit Crisis: Reserve Currency Status Under Threat
  • 2. Monetary Policy Pivot Expectations: Accelerated Rate Cuts and Inflation Deterioration
  • 3. Global Market Uncertainty Surge
• Technical Analysis and Outlook: Gold Eyes $3,400 Test

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Powell's Policy Stance: Fed Independence and Inflation Control

Current Fed Chair Jerome Powell has maintained monetary policy independence since taking office in 2018, upholding professional judgment despite political pressure from the Trump administration. This commitment has recently evolved into clear policy divergence with the White House, becoming a core driver of financial market volatility.

Powell's policy approach centers on three key principles:

• Anti-inflation Priority: Despite Trump's repeated calls for rate cuts to stimulate the economy, Powell maintains the federal funds rate at 4.25%-4.5%, emphasizing that premature cuts could worsen inflation while CPI remains above the 2% target (June CPI: 2.7% year-over-year).
• Tariff Inflation Warnings: Powell has repeatedly noted that Trump's new tariff policies (20%-40% levies on EU, Japan, Korea) will drive up import prices and intensify inflationary pressure.
• Budget Controversy: The Fed's $2.5 billion headquarters renovation budget overrun was labeled "wasteful luxury" by Trump's team, though Fed officials clarified no luxury facilities were involved. This incident is viewed as a political pressure tool.

Markets widely believe that forced removal of Powell would signal complete politicization of US monetary policy, breaking the Fed's century-long independence tradition — precisely the "institutional risk" investors fear most.

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Why Dismissal Rumors Triggered Gold's Breakout: Three Market Mechanisms

After news of Powell's possible dismissal emerged, gold rebounded from $3,318 to $3,371, gaining 1.6%, while the dollar index retreated from 99 to below 98. This move reflects several market dynamics:

1. Dollar Credit Crisis: Reserve Currency Status Under Threat

Fed independence forms the bedrock of dollar global credibility. History shows that central bank independence erosion typically leads to long-term currency depreciation. Deutsche Bank warns that if Powell leaves due to political pressure, the dollar index could plummet within 24 hours.

This concern stems from:

• Policy Credibility Decline: A politicized Fed might sacrifice long-term stability for short-term economic performance, undermining market confidence in dollar purchasing power.
• International Capital Reallocation: Global central banks and institutional investors may accelerate diversification away from dollar assets toward alternatives like gold.
• Rising Debt Costs: Dollar weakness would increase US financing costs, pressuring the $35 trillion national debt.

2. Monetary Policy Pivot Expectations: Accelerated Rate Cuts and Inflation Deterioration

Markets expect that if Powell departs, Trump would appoint a more dovish successor (such as White House economic advisor Kevin Hassett), accelerating the rate-cutting cycle. This expectation benefits gold through two channels:

• Real Rates Decline: Rate cuts would reduce the opportunity cost of holding gold. Current market pricing shows 70% probability of September rate cuts.
• Inflation Risk Rise: Politically-driven easing might prematurely release liquidity, combined with tariff-driven import price increases, creating a stagflation environment (economic stagnation + rising inflation) — gold's optimal macro backdrop.

3. Global Market Uncertainty Surge

Fed leadership changes would amplify market volatility:

• Policy Discontinuity Risk: New chair's policy orientation and communication style require adjustment time.
• Global Chain Reaction: Emerging markets may face capital outflows and currency turbulence, boosting safe-haven demand.
• Geopolitical Overlay: Trump simultaneously announced new tariffs on EU, Indonesia, and others (effective August 1), further strengthening defensive sentiment.

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Technical Analysis and Outlook: Gold Eyes $3,400 Test

From a technical perspective, gold's breakthrough above the key $3,350 resistance (convergence of 200-day moving average and Bollinger upper band) places bulls in control.

If gold holds above $3,350, the next target becomes $3,400. Conversely, failure would test $3,300 support.

Key Catalysts to Watch:

• July 30-31 Fed Meeting: Policy statement language changes
• Trump Administration Personnel Moves: Clear signals on Powell's fate
• Inflation Data: Whether July CPI shows tariff effects materializing

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Market Implications

Powell's dismissal risk has emerged as one of gold's biggest catalysts. In an environment of elevated policy uncertainty, gold's value as a non-political safe haven continues to shine.

Investors should monitor these critical junctures closely, capitalizing on trading opportunities amid market volatility. The intersection of institutional credibility, monetary policy expectations, and geopolitical tensions creates a perfect storm for precious metals.

The battle for Fed independence may ultimately determine not just gold's trajectory, but the broader architecture of global financial stability.