In 2018, Donald Trump, in his frustration, toyed with the idea of ousting Federal Reserve Chairman Jerome Powell over a dispute over interest rates. Fed leaders privately prepared an emergency response: a legal challenge against the president, in order to protect America’s central bank.
Powell told then-Treasury Secretary Steven Mnuchin that he would fight his impeachment if the president sought to carry it out, according to people familiar with the matter. Trump was angry that the Fed raised interest rates against his will.
For Powell, the risk of a legal battle—one he might have to pay out of his own pocket—was necessary to preserve the ability of future Fed chairs to carry out their duties without the threat of being ousted over policy disagreements.
Six years later, Trump returns to the White House, and the dormant drama of his shaky relationship with Powell comes back to the fore. When asked last week if he would resign if asked to do so, Powell replied with one word: “No.” He gave the same answer when asked if the president had the authority to fire him.
Powell, a former private equity manager with a law degree, was then pressed to explain his rationale. He gave another brief response: “Forbidden by law.”
His strong responses exposed the possibility that any attempt to force Powell to leave before his term ends in 2026 would likely be resolved by an unprecedented legal battle — the same legal battle that Fed chiefs had been bracing for years ago.
“If the president had his way, it would mean that any future chair would be subject to removal at the president’s whim,” said Scott Alvarez, who served as the Fed’s general counsel from 2004 to 2017. “I don’t think that’s a precedent that Powell would want to set, And that’s why I think he’ll fight it. It’s a huge precedent.”
Powell and other senior Fed officials, of course, took pains to avoid any provocative statements about Trump or the election. In keeping with his approach of avoiding drama and keeping a low profile, Powell did not seek to publicly raise the status of his role. The issue was raised again as an issue last week only in response to repeated hypothetical questions.
Even on Trump’s side, statements calling for Powell’s impeachment have not been heard recently. “I’m ready to let him finish his term, especially if I think he’s doing the right thing,” Trump told the Bloomberg network in an interview in June.
How should Trump act? The consultants do not reach an agreement
The people who advised Trump on the issue disagree among themselves on how far the president should go. Those with experience in the markets advised against replacing Powell. Scott Bessant, an investment manager who is now an advisor to Trump, suggested last month that the incoming president announce who he plans to choose as Powell’s successor, so that candidate can try to undermine Powell, and turn him into a ‘lame duck’. In an interview held last week, Besant said that after the criticisms he received, he no longer thinks it is worth implementing the idea.
Other Trump advisers are looking for ways to challenge Powell more directly. In their opinion, the central bank and its supporters in Washington and Wall Street have turned the independence of the Fed into an object of worship and admiration, to the extent that it is not supported by constitutional law and is not good for the economy.
Hours after Powell hinted last week that he would fight any layoffs, Republican Sen. Mike Lee (D-Utah) published a news article with a comment suggesting that the Fed should follow the White House’s instructions. “Another reason why we #EndTheFed” (to end the Fed’s tenure), he wrote in X.
The Executive Branch should be under the direction of the president
That’s how the Constitution was designed
The Federal Reserve is one of many examples of how we’ve deviated from the Constitution in that regard
Yet another reason why we should #EndTheFed pic.twitter.com/qfW7tFdhe8
– Mike Lee (@BasedMikeLee) November 8, 2024
The challenges: war on inflation and repayment of treasury debts
In his second term as president, Trump faces different circumstances in his relationship with the Fed in two important respects. First, Trump has less immediate opportunity to make his mark on the institution as a whole. In his first term as president, he managed to fill five vacancies on the seven-person board during his first year in office. Currently, there are no vacancies on the Fed’s Board of Governors, and only one seat is slated to open in the next two years.
Second, an attempt to remove the chairman of the Fed from office now, before the central bank has finished conducting its fight against inflation, will disturb the markets more than during his first term, when inflation was low. Now, both the short-term interest rates, which are set by the Fed, and the long-term interest rates The long, driven by broader forces, are much higher than they were during Trump’s first term.
Trump has repeatedly promised to lower inflation and interest rates. “Inflation, remember, hurts the country,” Trump said in May when asked about high borrowing costs. “And we can’t take that risk.”
Still, increased inflation volatility could increase the chance of a clash between the Fed and Trump’s White House, if new policies raise concerns at the central bank about inflation. For example, if a deficit-financed tax cut or a new round of tariff cuts lead investors to expect higher inflation, the Fed may leave interest rates higher than it would otherwise.
The markets will react “very badly”
Trump is also now entering a more perilous fiscal situation, with the Treasury expected in the coming years to pay back trillions of dollars in debt, which it borrowed at much lower interest rates. “There is only one factor that Trump’s decision about the Fed depends on, and that is the market,” said Mark Spindel, an investment manager who participated in writing the history of Fed independence.
If Trump tries to oust Powell, the markets will react “very badly,” said Michael Frawley, chief U.S. economist at JPMorgan Chase. Some analysts believe that a rise in bond yields in recent weeks reflects expectations of deficit-driven economic growth in a second term. Trump’s “Combined with uncertainty about who will run the Fed, you might get something very problematic,” he said.
Fed independence
The Fed has maintained its independence in setting monetary policy since the high inflation of the 1970s. President Richard Nixon privately pressured his former Fed chairman and adviser, Arthur Burns, to ease policy ahead of the 1972 election, according to Oval Office tapes. Burns agreed.
After years of high inflation were cured by a severe recession in the early 1980s, the Fed and other central banks around the world asked for and received from their governments considerable operational autonomy, or “independence,” to set interest rates, with the long-term good of the economy in mind. Central bank independence also absolves politicians from accepting blame for unpopular measures taken to stop inflation.
Answered the same answers five years ago
President Barack Obama put Powell on the Fed’s board in 2012, and Trump appointed Powell to lead the Fed in 2018. President Biden re-nominated him to a four-year term in 2022, and 80 senators voted to confirm him. His current term as chairman is expected to last until May 2026. He has a separate 14-year term on the board, ending in early 2028.
Trump has said several times in the past that he has the authority to fire Powell, but he has also acknowledged that the law is unclear about that. “I threatened to end his tenure,” Trump said last month at the Economic Club of Chicago, referring to his first term. “There was a question whether it was possible or not.”
In Trump’s first term, after his advisers told him he couldn’t fire Powell, Trump told Powell during a phone call, “I guess I’m stuck with you.” Months later, Trump floated the idea of demoting Powell and appointing another central bank director to the position of chairman.
In some ways, Powell’s comments last week were unremarkable because he said the same things five years ago. “If you got a phone call from the president today or tomorrow, and he said, ‘I’m firing you, pack up, it’s time to go,’ what would you do?” one lawmaker asked Powell during testimony in 2019. “Well, of course I wouldn’t,” Powell responded. “My answer was no.”
Even privately, he maintained the same view, out of duty to the institution and its successors. “I will never, never, never leave this job voluntarily until my term is over, under no circumstances. Nothing,” he told the Visitor that year. “It doesn’t even occur to me that there will be a situation where I won’t finish my term, except if I die.”
Powell’s ouster does not mean he will stop leading the bank
At that time, Fed leaders decided that if Powell’s position as chairman of the Fed’s board was called into question, the central bank’s separate interest rate-setting body, the Federal Open Market Committee, FOMC, would close ranks by meeting to immediately re-elect Powell as its chairman. .
The FOMC consists of the seven members of the Fed’s Washington Board and a rotating group of presidents from the Fed’s 12 banks, which are quasi-private institutions. The presidents of the Fed’s regional banks are appointed not by the president but by the bank’s directors, who are usually local business executives or non-profits. The FOMC elects its chairman at the first meeting of the year.
The result is that an attempt to oust Powell will bring little benefit in practice, because Powell will likely continue to lead the institution until the resolution of any litigation, which may extend beyond Powell’s term of office.
Alvarez, the Fed’s former legal advisor, said he thinks Powell will win a legal battle on the issue, partly because lawmakers who drafted and amended the law that created the Fed debated repeatedly, and decided not to include provisions that would allow the chairman to be fired at the president’s will.
The seven members of the Board of the Fed are appointed by the President for a term of 14 years. They must be approved by the Senate. The law says that they can be removed from their position only for a justified reason, which the court interpreted as a crime or abuse of office.
A separate law allows the president to appoint one of the seven members of the council as chairman of the Fed for a four-year term, also subject to Senate approval. The law does not specify whether the same standard also applies to dismissals.
“The argument that Jerome Powell cannot be demoted before the end of his four-year term is quite strong,” Alvarez said. Moreover, Supreme Court Justices Brett Kavanaugh and Samuel Alito, in separate opinions over the past decade, stated that they see the central bank as a unique body among the federal regulatory agencies.
Who will pay for the legal battle?
It is likely that Powell will have to pay for any legal battle, because it is not clear whether the Fed itself will be in a position to challenge his removal.
Dealing with the views of presidents has always been a part of the Fed leader’s job, but it used to be done mostly in private. President Lyndon B. Johnson once asked if he could fire Fed Chairman William McChesney Martin over a disagreement on policy. His lawyers said no. Instead, he summoned Martin to his ranch in Texas to reprimand about the interest rate increase, saying it was a despicable act, according to Martin’s report. At the same time, Johnson hid the controversy from the public. “Your job is to stir up a fight. My job is to stop him,” Johnson told reporters while sitting on his porch with Martin after the reprimand.
Powell said his broader goal is to preserve a Fed that transcends divisive politics by focusing on rigorous, evidence-based analysis. “I feel that I bear overall and individual responsibility for the institution,” he said in March.
Last spring, Powell dismissed concerns about potential challenges to the Fed’s independence, even after the Wall Street Journal reported that Trump’s allies were formulating ideas to undermine the central bank’s autonomy. When asked about the issue in May, Powell indicated strong support for the Fed’s independence on Capitol Hill. “So I’m less concerned about that than the kind of things that have been in the press lately might suggest,” he said.
During Trump’s first term, Senate Republicans often worked to preserve the Fed’s autonomy, thwarting attempts to confirm some nominees they saw as unfit. Several Republican lawmakers who sit on the committee that oversees the Fed said this spring that they would be concerned if Trump tried to make changes to the Fed’s autonomy. “I have to think about the Fed for the next 50 years, not the next four, and independence is important,” Republican Sen. Tom Tillis (R-North Carolina) said earlier this year.
Spindel, the chief investment officer, wondered whether the Fed’s independence would receive the same protection from senators in a second Trump term. “Part of the Trump 2.0 story is going to be about understanding where the executive branch stops,” he said.