US STOCKS-Wall Street edges higher after Trump denies plans to fire Powell

By David French, Suzanne McGee and Pranav Kashyap

July 16 (Reuters) - Wall Street benchmarks rebounded modestly on Wednesday, after a chaotic half hour when media reports suggested U.S. President Donald Trump was set to fire Federal Reserve Chair Jerome Powell.

Shortly before midday, the main U.S. stock indexes fell sharply, the dollar plunged and Treasury yields rose after Bloomberg News reported the possibility of replacing Powell, citing an unidentified White House official.

Separately, Reuters News reported, citing a source, that Trump was open to the idea of firing Powell.

Trump was quick to deny the reports, even as he unleashed a new barrage of criticism against the Fed chair for not cutting interest rates.

"One purpose of this, I suspect, was testing the market to see how it feels about this scenario," said Alex Morris, chief investment officer at F/m Investments.

Trump's denial revived equity markets after the benchmark S&P 500 fell as much as 1% and the Nasdaq dropped as much as 1.1%.

As of 2:31 p.m. ET, the Dow Jones Industrial Average .DJI rose 133.13 points, or 0.30%, to 44,156.42. The S&P 500 .SPX increased 11.36 points, or 0.18%, to 6,255.12, and the Nasdaq Composite .IXIC gained 26.92 points, or 0.13%, at 20,704.72.

Investors had been on edge for weeks about the prospect of Powell being removed from his job before his term ends next May, as Trump has repeatedly criticized him for not cutting U.S. rates quickly enough.

The CBOE Volatility Index .VIX, Wall Street's "fear gauge," hit a more than three-week high in the wake of the initial Powell reports, but eased from those levels.

Despite Trump's demands for easier credit, Fed officials have resisted cutting rates until there is clarity on whether his tariffs on U.S. trading partners reignite inflation.

The chance of a rate cut in September was viewed around 56% earlier in the day, according to CME FedWatch.

Before the Bloomberg report, the session was choppy as investors were on edge after a mixed bag of inflation data muddied the economic outlook. Producer prices flatlined in June, as tariff-driven goods costs were balanced out by weaker service prices.

Just a day earlier, unexpectedly strong consumer inflation had already dented hopes for deeper Fed rate cuts, with Trump's tariffs partly fueling the uptick in prices.

On Wednesday, the second day of this earnings season, another round of stronger profits from Wall Street's big banks failed to ignite their own stock prices.

Goldman Sachs GS.N inched 0.4% higher after notching a 22% earnings surge.

Both Bank of America BAC.N and Morgan Stanley MS.N joined the trend of higher profits fueled by trading desks navigating market turbulence in the second quarter. Their shares were trading, respectively, down 0.6% and 2.2%.

Semiconductor stocks were sluggish after news that Nvidia O> would be allowed to sell its H2O chips in China had fueled gains in the previous session. The semiconductor index .SOX was 1.2% lower, having hit a 12-month high on Tuesday.