Federal Reserve Chair Jerome Powell has made it clear that if President Donald Trump attempts to remove him, he will immediately file a lawsuit. He considers his position legally protected, despite Trump’s disagreement with his interest rate policy.
Complex Relationship Between Trump and Powell
Trump selected Powell in 2016 at the beginning of his first term. But by 2018, tensions between them had emerged. Trump wanted interest rates lowered, while Powell kept them high to control inflation. Trump’s frustration was an open secret, and he even considered removing Powell from his position.
Powell informed then-Treasury Secretary Steven Mnuchin that if Trump tried to interfere, he was prepared to fight legally. He labeled such an action a “dangerous precedent” that could weaken the Fed’s independence.
Trump’s Return and a Potential Legal Battle
Trump is now seeking a return to the White House, reigniting his old conflict with Powell. Any attempt by Trump to remove Powell could spark a historic legal battle, potentially impacting financial markets and the economy. The Fed has been preparing for years to deal with any possible interference.
The Fed’s Preparations for Defense
Former Fed General Counsel Scott Alvarez expressed confidence that Powell would never allow himself to be used as a political tool. He emphasized that if a president succeeded in removing a Fed chair, it could mean that future chairs could be dismissed at the president’s whim. Alvarez believes Powell is determined to defend the Fed’s independence.
Trump’s Options and Consequences
Though Trump has not publicly stated an intention to remove Powell, some of his advisors suggested he appoint a “shadow” Fed chair to undermine Powell. This idea faced criticism and was eventually abandoned. Nevertheless, some Trump allies see the Fed’s independence as problematic, arguing that the Fed should be accountable to the president.
The Importance of Fed Independence
The Fed’s history of independence dates back to the 1970s when Richard Nixon pushed for lower interest rates before the election, which led to subsequent high inflation. Since then, the Fed has worked to resist political pressure. Powell, reappointed by Biden in 2022, has a term that runs until 2026, with his board membership extending until 2028. His dismissal would require grounds such as a legal violation.
What’s Next?
Powell has avoided direct conflicts with Trump, but he insists he will not yield. He is determined to resist pressure and protect the Fed’s independence. The Federal Open Market Committee (FOMC), which sets interest rates, is ready to back Powell. Even if Trump removes him from his position as Fed Chair, the FOMC could elect Powell as its chair.
A confrontation between Trump and Powell could spell chaos for financial markets. Economists predict that such news could cause bond yields to surge significantly.
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