Trump and Jerome Powell: As Trump vs. Powell escalates, the struggle for economic control has intensified. What does it mean to the independence of the Federal Reserve?
These developments are taking place in the context of wider turmoil in the economy and financial markets, Trump’s tax on imports. Most economists fear that attacks on the Fed’s long-standing independence and political independence will further undermine markets and increase uncertainty surrounding the economy.
Trump said in a comment on Thursday in the White House that he has the right to remove Powell and criticized him for not actively reducing interest rates.
“If I wanted him out, he would leave there soon, believe me,” Trump said. “I’m not happy with him.”
All scrutiny threatens the Fed’s respected independence, which has long been supported by most economists and Wall Street investors. Here are some questions and answers about the Fed.
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Why is the independence of the Federal Reserve important?
The Fed has exerted extensive power over the U.S. economy. By lowering the short-term interest rates it controls (usually when the economy moves), the Fed can make borrowing cheaper and encourage more spending, accelerating growth and hiring. When speed is increased (to calm the economy and hit inflation), it weakens the economy and causes unemployment. Economists have long preferred independent central banks because they can more easily take unpopular steps to combat inflation, such as raising interest rates, which makes borrowing to buy a home, car or equipment more expensive.
After inflation surged in the 1970s and early 1980s, most economists consolidated the importance of an independent Fed. Former Fed Chairman Arthur Burns was widely blamed for allowing the painful inflation of that era to accelerate, succumbing to pressure from President Richard Nixon to keep the rate low in the 1972 election. Nixon was worried that higher interest rates would cost him his election, which he won on the slopes.
Paul Volcker, who was eventually appointed chairman of the Federal Reserve by President Jimmy Carter in 1979, pushed the Fed’s short-term interest rate to a staggering height of nearly 20%. (currently 4.3%). The striking rate triggered a sharp recession, pushing unemployment to nearly 11% and sparking widespread protests.
But Volker did not retreat. By the mid-1980s, inflation had returned to low-unit numbers. Volcker’s willingness to cause pain to the economy The pain of throttle inflation is seen as a key example of the value of an independent Fed.
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What do Wall Street investors think?
Powell’s efforts will almost certainly lead to stock prices falling, bond yields rising, interest rates on government debt, and borrowing costs on mortgages, auto loans and credit card debts.
Most investors prefer an independent Fed, partly because it usually manages inflation better without political influence, and because its decisions are more predictable. Federal Reserve officials often discuss publicly how they will change interest rate policies if the economic situation changes.
If the Fed is more politically shaped, it will be difficult for financial markets to expect or understand its decisions.
So does this mean that the Fed is completely irresponsible? OK, no. A Fed chair like Powell is appointed by the president for a four-year term and must be confirmed by the Senate. The president also appointed six other members of the Fed’s governing committee, whose term is up to 14 years, although most governors left before their termination.
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These appointments can significantly change the Fed’s policies over time. Former President Joe Biden has appointed five of the current seven members: Powell, Lisa Cook, Philip Jefferson, Adriana Coogler and Michael Barr. As a result, Trump will have fewer opportunities to date. He will be able to replace Kugler, who filled an unexpired term in his term ending on January 31, 2026.
At the same time, Congress can pass legislation to set the Fed’s goals. For example, in 1977, Congress gave the Federal Reserve a “double mandate” to keep prices stable and seek the largest jobs. The Fed defines a stable price as inflation of 2%.
The 1977 law also required the Federal Reserve Chairman to testify twice a year on economic and interest rate policies.
But can the president fire Powell?
Powell said the law that established the Fed does not allow the president unless it is for reasons. Powell was appointed to the Fed’s board of directors, and was promoted to the position of chairman in 2017 by Trump.
Most legal scholars agree that Trump cannot fire Powell from the Fed’s board, but there is less consensus on whether the president can treat him as chairman. In January, Michael Barr, who served as vice chairman of the supervision, resigned from the position but remained on the board to avoid a legal conflict over whether Trump could fire him.
If Trump tries to fire Powell, the subsequent battle will almost certainly end in the Supreme Court.
What can the Supreme Court do?
We may soon show how the Supreme Court will rule this summer. The court has already had a case on whether the president can fire senior officials from independent agencies.
The case stems from Trump’s dismissal of two officials, one from the National Labor and Industrial Relations Commission and another from an agency that protects workers from political interference. The Supreme Court last week let the shooting stand while considering the case. It could rule that this summer, the president, as head of the executive branch, could fire officials at any federal agency even if Congress intends to be independent.
The case would overturn a 90-year-old juris called Humphrey’s executor, and the court ruled that the president could not fire such officials.
Powell said Wednesday that he is watching the case closely, adding that it may not apply to the Fed. Lawyers in the Trump administration have tried to narrow the focus of the case and believe it is not related to the Fed.
The Trump administration and Supreme Court justices have previously imposed exemptions to the Federal Reserve. In February, the White House issued an executive order that more directly signed several financial regulators under the president’s control, including the Federal Reserve and the Securities and Exchange Commission. However, the order specifically exempts the Fed from setting interest rates from the order.
In a 2023 case, Judge Samuel Alito said in a footnote that the Fed is a “unique institution with a unique historical background” that makes it different from other independent institutions. The Fed could be exempted if the court does give the president more power over the heads of independent institutions.
