Written by: Jia Yao Fang, Wall Street Insight
Although Trump's criticism of Powell escalated last week, he publicly stated this Tuesday that he does not plan to fire Powell and accused the media of misrepresenting his intentions.
On April 23rd Eastern Time, media sources cited insiders saying that the White House had previously paid close attention to Trump's public criticism of Powell, with White House lawyers even privately studying legal options for firing Powell, including whether he could be dismissed for "good cause", as legal provisions state that Federal Reserve board members can only be removed before their term ends for valid reasons, which courts typically interpret as malfeasance or misconduct.
Additionally, Trump's change of mind was related to Treasury Secretary Besent and Commerce Secretary Howard Lutnick, who warned Trump that firing Powell could trigger market turmoil and legal disputes. Lutnick told Trump that firing Powell would not change interest rates, as other Federal Reserve members might maintain a monetary policy similar to Powell's.
Market voting with their feet, Trump abandons firing
Media noted that Trump's statement of "not intending to fire Powell" indicates that he and his advisors continue to closely monitor Wall Street and big corporate reactions.
Although Trump insists he is not influenced by market fluctuations, he and his advisors clearly noticed market resistance to his aggressive trade and economic measures, and are gradually making compromises. After all, White House spokesperson Taylor Rogers previously stated that presidential advisors would provide suggestions, but the final decision-maker remains the president himself.
Tesla CEO Musk stated in Tuesday's earnings call that he would advocate for lowering tariffs in conversations with the president. Musk said: "Whether he listens to my advice is up to him." Due to Tesla's stock price decline, he will reduce his work time on DOGE, and Tesla's global sales have also declined due to Musk's relationship with the government.
During his first term, Trump frequently criticized Federal Reserve Chairman Powell and tried to influence Federal Reserve decisions through social media, but with limited effect and without substantially impacting the Fed's independence. However, market concerns about the Fed's independence have significantly escalated this time, mainly for two reasons.
First, Trump is more inclined to challenge institutional and legal norms in his second term. The U.S. Department of Justice is attempting to overturn a 90-year-old legal precedent that is an important safeguard preventing Fed officials from being dismissed before their term ends, and many legal experts believe that if this precedent is overturned, the Fed's independence will be seriously threatened.
Second, because Trump's tariff scale far exceeds his first term and is broader, this could lead to more severe inflation issues this year. Trump's tariff policies undoubtedly make the Federal Reserve face more difficult choices when balancing inflation and economic growth.
Firing Powell is too costly and ineffective
In fact, Trump faces numerous obstacles in firing Powell.
On one hand, bond investors view the Federal Reserve's independence as a crucial pillar of the U.S. financial system. Many investors believe the Fed should not be subject to government intervention. If foreign investors worry about government interference to tolerate higher inflation, they might reduce U.S. debt purchases, thereby driving up interest rates.
Tim Mahedy, former senior advisor and chief economist at the San Francisco Fed, stated last week that if Trump successfully forces the Fed chairman to step down, the market reaction would be catastrophic. The pain would come so quickly and severely that the president would be forced to immediately retract his promise, or face a systemic financial crisis.
On the other hand, many Wall Street analysts believe that even if Trump fires Powell, it would not easily change the Fed's monetary policy, as other Fed board members might not support rate cuts. For example, Trump recently promoted Bowman, whom he appointed during his first term, to vice chairman of bank supervision. Bowman is one of the most outspoken Fed officials and has warned about the risks of cutting rates too early or quickly.
Powell has consistently stated that he does not believe the Fed's independence is threatened. Powell believes that if a Fed chairman is fired due to policy disagreements, it would create significant pressure on future Fed chairs and potentially affect their decision-making freedom. To protect Fed chairs' ability to make decisions without political pressure, Powell believes it is necessary to prepare for potential legal conflicts, even if he personally might bear the cost.
Federal Reserve independence is not a new issue
Since the high inflation of the 1970s, the Federal Reserve has placed great importance on its independence. At that time, President Nixon pressured the Fed to loosen monetary policy, resulting in severe inflation. The high inflation problem was ultimately contained through the economic recession of the early 1980s.
Although the Fed's independence is not legally formalized, this historical lesson prompted a consensus among the Fed, the president, and Congress that the Fed should have considerable independence to ensure it can maintain low inflation and a healthy job market.
By the 1990s, many other countries' central banks also began to gain greater independence, allowing them to make interest rate decisions without government interference, thus better serving long-term economic development.
