Trump's Authority Over Firing Federal Reserve Chair Powell
The Trump administration's push for the Federal Reserve (Fed) to lower interest rates could provide short-term economic stimulus, but it also poses risks of increased inflation and undermining the Fed's independence.
Lower interest rates can encourage borrowing and spending, potentially boosting economic performance and reducing government debt interest payments, as Trump has advocated. However, the Fed has been cautious because cutting rates amid tariff-driven inflation pressures could rekindle inflation, complicating its dual mandate to control inflation and maximize employment.
A recent slowdown in job growth could prompt the Fed to consider rate cuts to avoid an economic slowdown, but this balances against inflation concerns. The Fed has so far resisted immediate cuts but appears poised to adjust as economic conditions evolve.
Trump's repeated public pressure, including criticism of Federal Reserve Chair Jerome Powell and proposals to influence appointments, has raised concerns about political interference compromising the Fed's independence. This is crucial for credible monetary policy.
Despite past resistance, market futures increasingly price in a rate cut, reflecting investor sentiment shaped by economic indicators and political pressure. However, persistent political pressure risks undermining market confidence in the Fed's ability to manage monetary policy effectively, which can lead to greater economic volatility.
The Supreme Court has weighed in on the issue, disagreeing with the argument that the Fed's Board of Governors or other members of the Federal Open Market Committee have for-cause removal protections. At least six justices would reportedly rule against the possibility of Trump firing Powell. However, the White House continues to explore ways to lower interest rates.
The Office of Management and Budget has cited cost overruns in the Fed's renovation project as evidence of Powell's broad mismanagement. Potential replacements for Powell would generally lean toward tighter monetary policy, not the easier stance Trump desires. Treasury Secretary Scott Bessent has been named in discussions for replacing Powell as Fed chair.
It is worth noting that President Trump has said he never intended to fire Powell and has no intention of doing so. Mizuho Securities Chief U.S. Economist Steven Ricchiuto warns that political pressure on the Fed could backfire on Trump, potentially leading to higher rates.
Firing Powell could also push long-term Treasury yields higher, contradicting the administration's stated preference for lower yields, according to macro strategist Felix Vezina-Poirier. The leader of the National Economic Council agrees that the Federal Reserve faces a problem of oversight and excess spending.
Associate Justice Elana Kagan wrote a dissent, stating that the majority decision results in "the creation of a bespoke Federal Reserve exception." The Supreme Court did not overrule a 90-year-old precedent in its May 22 opinion, allowing President Trump to fire two members of other federal agencies' boards.
In sum, the Trump administration's pressure to lower rates involves a trade-off: short-term economic support versus risks of inflation resurgence and erosion of the Fed's autonomous decision-making. The Federal Reserve has so far resisted immediate cuts but appears poised to adjust as economic conditions evolve.
- Political pressure on the Federal Reserve, such as Trump's criticisms of Chair Jerome Powell, raises concerns about potential political interference, which could compromise the Fed's independence essential for credible monetary policy.
- The Supreme Court's recent decision on the issue of removal protections for Fed officials does not entirely rule out the possibility of Trump firing Powell, but it seems that at least six justices would oppose such an action.
- Amid the ongoing push for lower interest rates by the Trump administration, concerns over inflation resurgence and the erosion of the Fed's autonomous decision-making remain significant. In sports terminology, this is like playing a high-risk, high-reward game, where the potential benefits of short-term economic stimulus must be weighed against the risks of long-term instability.
