WASHINGTON (Reuters) -U.S. President Donald Trump said Wednesday he is not planning to fire Federal Reserve Chair Jerome Powell even as he unleashed a fresh round of criticism against the central bank chief and declined to completely reject the possibility of ousting him.

A Bloomberg report earlier Wednesday that the president is likely to fire Powell soon sparked a drop in stocks and the dollar, and a rise in Treasury yields.

Trump said the report wasn't true. 

"I don't rule out anything, but I think it's highly unlikely unless he has to leave for fraud," Trump said, a reference to recent White House and Republican lawmaker criticism of cost overruns in the $2.5 billion renovation of the Fed's historic headquarters in Washington. There has been no indication of fraud, and the Fed has pushed back on that criticism.

Stocks pared losses and Treasury yields pared declines after Trump's fresh comments, which also included a now familiar complaint that Powell should have already cut interest rates and is a "terrible" chair. Trump also said he did talk with some Republican lawmakers about firing Powell.

As Trump downplayed the possibility, though, Republican Senator Thom Tillis used his time on the floor of the Senate to deliver a spirited defense of an independent Fed, which economists say is the linchpin of U.S. financial and price stability.

"There's been some talk about potentially firing the Fed chair," said Tillis, a member of the Senate Banking Committee that oversees the Fed and confirms presidential nominations to its Board. Subjecting the Fed to direct presidential control would be a "huge mistake," he said.

"The consequences of firing a Fed Chair, just because political people don't agree with that economic decision, will be to undermine the credibility of the United States going forward and I would argue if it happens you are going to see a pretty immediate response, and we've got to avoid that," Tillis said.

Asked if it would be a problem for Trump to fire Powell, Senate Majority Leader John Thune told reporters: "My understanding is he doesn't have any intention of doing that." "President Trump's own analysis and that of his Treasury Secretary is that he cannot fire Jay Powell," House Financial Services Committee Chair French Hill told CNBC earlier on Wednesday.

Powell, who was nominated by Trump in late 2017 to lead the Fed and then nominated for a second term by Democratic President Joe Biden four years later, has repeatedly said he intends to serve out his term that goes through May 15, 2026. A recent Supreme Court opinion has solidified a long-standing interpretation of the law that the Fed chair cannot be fired over policy differences but only "for cause." 

Last week, the White House appeared to try to lay the groundwork for that when the director of the Office of Management and Budget, Russell Vought, sent Powell a letter saying Trump was "extremely troubled" by the renovations of two Fed buildings.

Powell responded by asking the U.S. central bank's inspector general to review the project, and the central bank posted a 'frequently asked questions' factsheet, which rebutted some of Vought's assertions about VIP dining rooms and elevators that he said added to the costs.

The Fed's decision to keep its policy rate in the 4.25%-4.50% range while it assesses the impact of the Trump administration's tariffs on inflation has drawn Trump's increasing ire.

The "formal process" for identifying a successor to Powell is under way, Treasury Secretary Scott Bennett has said. Bennett is one candidate for the job, along with White House economic advisor Kevin Hassett, former Fed governor Kevin Warsh, and current Fed governor Christopher Waller.