US President Trump has recently been firing frequently, demanding that Federal Reserve Chairman Powell lower interest rates to mitigate the economic impact of his tariff measures. Kevin Hassett, Director of the White House National Economic Council, revealed on Friday that Trump and his team are "continuously evaluating" the option of replacing Powell.
Firing Powell Could Trigger Economic Recession
In response, Evercore ISI analysts warned that any attempt by the Trump administration to dismiss Powell would "lead to a surge in stagflation trading," but the dismissal is "unlikely to happen". Through bond and foreign exchange market trends, it can be seen that the market has lost confidence in Trump's economic policies. However, there are currently no signs that the market has lost confidence in the Federal Reserve, as inflation expectations remain at a low level.
Evercore ISI analysts believe that any action that undermines the independence of the Federal Reserve would lead to a sharp rise in US long-term bond yields due to inflation risks, a dramatic steepening of the yield curve, a plunge in the US dollar, and a comprehensive increase in various risk premiums, including stock risk premiums, which could directly trigger an economic recession.
Powell as a Scapegoat?
However, according to a report in Barron's, former Federal Reserve officials and economists believe that concerns about Powell being fired or the Federal Reserve being taken over by Trump may be an overreaction. Instead, they believe that Trump is launching a more strategic political maneuver: he may let Powell continue to serve as a scapegoat for future economic deterioration.
Former Federal Reserve Vice Chairman lan Blinder analyzed that although Trump publicly criticizes Powell, there is another political calculation behind it:
Trump always wants to find someone else as a scapegoat.
Jared Bernstein, White House Chief Economist during the Biden era, stated that it is very likely that Trump does not intend to replace Powell, but plans to let him continue to serve. If the economy falls into a recession, which is entirely caused by Trump's policies, Powell can serve as a scapegoat.
Powell's term as Federal Reserve Chairman runs until May 2026, and he has repeatedly stated that he will complete his full term. At a press conference last November, he explicitly stated that even if the president asks him to leave, he would not resign, as he believes he has no legal obligation to do so.
Powell further emphasized this week that the independence of the Federal Reserve is a "legal fact" and that this independence is "widely understood and supported in Washington and Congress, and that is what is truly important".
