Former President Donald Trump has long been interested in firing Federal Reserve Chairman Jerome Powell. This upcoming decision will have tremendous consequences for the future trajectory of the U.S. economy and our financial markets. Trump has made no secret of his distaste for Powell over the last few months. He knocked Powell for not doing enough to lower interest rates fast enough. Analysts are cautioning that such a firing of Powell would open up some chaotic, constitutional, and market-rattling scenarios.
In a recent research note, Wolfe Research outlined three potential outcomes if Trump proceeds with his plan to remove Powell. That could allow Trump to keep the Chairman in charge while he pursues a judicial injunction to try to bar Powell from leaving. A third possible scenario is that Powell could agree to resign, only to subsequently litigate for reinstatement. The third possibility is that Powell tries to keep his job and Trump tries to fire him through use of the executive order.
Trump’s history of swiftly firing employees who publicly express his support raises questions about the feasibility of this potential dismissal. On several previous occasions, he has demonstrated a willingness to fire people immediately after announcing that they have his trust. If so, this pattern may be an omen of a deeper lurking trend of executive instability in his administration.
“There are a lot of bad ideas out there. But the president firing the chairman of the Fed, or, should I say, trying to fire him — because that’s not clear to me at all that he could succeed — that’s among the worst ideas.” – Roger Altman
Roger Altman, founder of advisory firm Evercore, is adamant that Trump should not fire Powell. He worked previously as the deputy Treasury secretary under President Bill Clinton. He contends that a move to condemn would almost certainly make for a long, ongoing legal tussle. Altman expressed doubt about whether Powell would agree to resign, stating, “I don’t think Chairman Powell would accede to a request that he leave.” He further commented, “So I think, ultimately, this would be resolved in the courts.”
As Wolfe Research further highlighted, the legal swamp created by this arrangement is deep and dangerous. They noted, “The first big question is whether he would, in fact, be de facto fired as litigation proceeds.” Analysts pointed out that Powell’s singular position as the CEO of his agency only complicates matters. This is a clear departure from past independent agency firings.
If Trump attempts to push Powell out, kicking and screaming, Wolfe Research thinks the reaction would be severe. They’re anticipating Powell to sue to challenge the removal. They remarked, “If Trump moves to actually fire Powell rather than just pressure him to resign, Powell would presumably sue to stop it.” The possibility that any court ruling on this issue might find against the states could lead to turmoil in financial markets.
Furthermore, the notion of Powell being forcibly removed from the Federal Reserve by law enforcement conjures disturbing images for investors. Wolfe Research warned, “Needless to say, Powell being escorted out of the Fed by either D.C. police or federal law enforcement would be a worrying image for markets.”
This is why Trump nonstop bashes the Federal Reserve. Most recently, he went on record calling a $2.5 billion renovation project that was begun under Powell “misguided” and “egregious.” In reaction to these heavy criticisms, Powell has moved quickly. He has asked the inspector general to review the entire project to ensure transparency and accountability.
As you might imagine, economists and financial analysts are hopping mad. They worry that he is laying the groundwork for a future foray into politicizing the central bank. People have made these comparisons in the U.S., to Turkiye and Argentina. Both of these countries face high inflation and a crisis of central bank independence.
“We expect, as does everyone else, that it would be significantly negative for markets, likely driving both an equity selloff and a counterproductive spike in long-term yields.” – Tobin Marcus and Chutong Zhu
As a result, market analysts warn that if Trump were to carry out his threat to fire Powell the fallout could be dangerous for financial stability. As Tobin Marcus and Chutong Zhu have recently confessed, they were hoping to see anguished market responses if a scenario like that should come to pass.