President Donald Trump's renewed calls for Federal Reserve Chair Jerome Powell's resignation have prompted investors to protect portfolios against the risk of higher inflation, as a central bank more willing to lower interest rates could fuel price rises and make lenders demand higher compensation to hold bonds.

While a Fed chief more friendly to cutting rates could be mixed for equities in the short term, it would translate into a weaker U.S. dollar, increased volatility in the Treasuries market and higher longer-term rates, meaning more expensive borrowing costs for mortgages and corporate bonds.

Since returning to the White House in January, Trump has repeatedly railed against the Powell-led Fed for not cutting interest rates.

If market participants perceive that Fed independence is eroding, moves in financial assets could be wild, some analysts say. One of the top risks is that investors will sell Treasury bonds, lifting interest rates on longer-term maturities in the U.S. debt market relative to short-term securities.

"If markets believe that a politically-captured Fed will lower rates to stimulate growth regardless of economic consequences, long-term inflation expectations will rise, causing the curve to steepen," said Guy LeBas, chief fixed income strategist at asset manager Janney Capital Management.

"It's impossible to be confident in the magnitude of the move, but my guess is it'll be large - possibly measured in percent increases in 30-year Treasury yields, not basis points."

The minutes from the Fed's June 17-18 meeting, which were released last week, showed little support for a cut at the central bank's July 29-30 meeting, as most policymakers remain concerned about the inflationary risks that Trump's import tariffs could pose.

Even so, Trump has said Powell's resignation "would be a great thing." The president, who cannot fire the Fed chief over a monetary policy dispute, and his administration have publicly called for Powell's exit or for rates to be cut on multiple occasions this month.

"While short-dated yields could fall in this scenario based on a faster pace of Fed rate cuts moving forward, longer-dated yields would likely recalibrate higher for stickier inflation and rising term premia based on the erosion of institutional trust," said Chip Hughey, managing director of fixed income at Truist Advisory Services.

Bond investors are pricing in increased price pressures in the inflation market over the next few years. Breakeven inflation as indicated in the U.S. five-year Treasury Inflation-Protected Securities hit 2.476% late on Monday, a three-month high.

In a recent escalation of criticism of Powell, the White House is probing cost overruns in the renovation of the Fed's historic headquarters in Washington.

The questioning has intensified concerns among market participants over risks that the Trump administration will try to fire Powell for cause, perhaps the only legal path for it to do so. U.S. Treasury 30-year yields on Tuesday topped 5% for the first time since late May, as investors fretted about the country's huge fiscal deficit and assessed the risk of Powell's exit from the central bank.

Source: Investing.com