The Fed episode overshadowed otherwise decent set of U.S. economic updates - showing relatively subdued producer prices and above-forecast industry output last month and offsetting anxiety about some tariff-related price rises in Tuesday's consumer inflation report.
The Powell story also obscured another decent set of bank earnings, with individual stock reactions for Goldman Sachs, Morgan Stanley and Bank of America underwhelming - much like the prior day's results. Johnson & Johnson did surge 6%, however, after halving its expectations for costs related to new tariffs and raising full-year profit projections.
But the burst of speculation about Powell's exit did reveal something of the market's reaction function on the long festering issue and also, to some extent, the potential size of those reactions.
The dollar and short-term Treasury yields kneejerked lower on the Bloomberg report that claimed Trump was about to fire the Fed boss. With Trump's insistence on steep and immediate interest rate cuts as a backdrop, the prospect of Powell's removal upped monetary easing speculation instantly.
But concern about damage to Fed independence and possibly overeager rate cuts now in the face of above-target inflation saw long-term Treasury yields surge, the yield curve steepen and stocks drop almost 1%.
Trump quickly walked back the report and said he discussed firing Powell with Republican lawmakers on Tuesday but now felt he was "highly unlikely" to do so. Markets quickly reversed all their initial moves, puzzling over just what happens next.
Many investors felt the whole piece was just calculated to heap pressure on the Fed Chair to resign of his own accord, with fresh angles of attack from the White House on Powell's responsibility for cost overruns in renovating Fed headquarters.
"I'd love it if he wants to resign, that would be up to him," Trump added later.
But relatively limited extent to which punters believe Trump will pull the trigger this year can be seen in only betting sites. Even at the height of Wednesday's tension, Polymarket's site showed just a one-in-four chance of Powell's ouster this year. And they ebbed since back to show roughly a 20% chance.
The upshot in wider financial markets today is that a full recovery in stock prices and the dollar has been sustained - with long bond yields also returning to early Wednesday levels just over 5%.
Two-year Treasury yields remained about 5 basis points lower and 10-year inflation expectations in the bond markets edged above 2.4% for the first time since February.
Wall Street stock futures were higher again ahead of the bell.
Thursday brings another heavy slate of economic updates, with June retail sales and weekly jobless claims topping the list. The corporate earnings season is now in full swing, with Netflix and General Electric and regional banks among those reporting.
Given the Fed anxiety, speaking appearances from top board members will be watched especially closely - not least the dovish Christopher Waller, tipped by some as a possible Powell replacement and in favor of resuming rate cuts as soon as this month.
On Wednesday New York Fed President John Williams refused to comment on Powell's position but said monetary policy is in the right place and warned the impact of trade tariffs is only just starting to hit the economy.
Overseas markets were in relatively buoyant mood too, with Asia and European shares up 0.5-1.0%.
Taiwan chip giant TSMC reported results that topped analyst forecasts, undoing some of the pessimism in the sector from Dutch chip-making tool supplier ASML's revenue warning the previous day.
European shares rose on Thursday after four consecutive sessions of losses, supported by strong quarterly results from Switzerland's ABB and some renewed optimism over a potential U.S. trade deal.
Ahead of weekend elections, Japan's Nikkei recovered from early losses to end higher as a weakening yen that hit three-month lows this week bolstered sentiment chip shares were lifted by TSMC results.
G20 finance chiefs will meet in South Africa on Thursday under the shadow of President Donald Trump's tariff threats and questions over their ability to tackle global challenges together. U.S. Treasury Secretary Scott Bessent will not attend the two-day meeting in the coastal city of Durban, marking his second absence from a G20 event in South Africa this year.
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