Federal Reserve Chair Jerome Powell certainly finds himself in very hot political waters. Former President Donald Trump is taking very public shots at Powell’s leadership and trying to orchestrate his ousting. Powell, chair of the Federal Open Markets Committee, is convinced that if it comes to that, the President can’t legally fire him. We know that he is resolute on this point.
Part of Trump’s discontent with Powell has been his frustration that Powell has not pursued lower interest rates. The ex-President has called Powell a “big fat failure,” taking to Truth Social to vent about the Fed’s newly hawkish monetary policy. Trump, along with his latest threat to fire Powell, just fired another shot in his quest to drive down interest rates. What’s less clear is whether he has the legal authority to do so in advance of Powell’s term expiring next year.
Here’s a roundup of responses from economists on the impact of such a move. They say his firing would call into question the independence of the Federal Reserve. Second, it means ignoring the entire other 6 person Fed Board. Doing so would have important, potentially market-shaking impacts. What we might expect are a lower dollar value and higher long-term rates.
Powell’s leadership has been under fire, especially from shortsighted politicians such as Trump who are calling for a change in the direction of monetary policy. Despite this, Powell has continued to insist that removing him from office would not mean lower interest rates right away. This illustrates the cardinal rule that the Federal Reserve must remain free from short-term political device, a founding doctrine that forms its credibility and potency.
As Trump’s criticisms grow louder, concerns are mounting about the implications for the Federal Reserve’s stability. Most analysts fear that if Trump follows through on such threats it would provoke an extreme counter-reaction in financial markets. They caution that this response may be larger than predicted. Investors and stakeholders are understandably anxious to keep a close eye on the unfolding saga. They know these changes at the top of the Fed could provoke unintended and unpredictable economic impacts.
Powell’s current term as chair of the Board of Governors will expire next year. Long-term, this creates an opportunity for future leadership changes in line with the political cycle. The threat of an unexpected termination is creating a fear for the independence of the Federal Reserve’s policy at a time of increasing political pressure.