The Republicans won the popular vote, regained control of the Senate, and are nearing a majority in the House of Representatives. This is bad news for Fed Chairman Jerome Powell, with whom Donald Trump has a score to settle.
When the Federal Reserve raised interest rates in 2022, it wasn’t fast enough according to Trump. Now that the US central bank is cutting rates, it’s once again too slow in his view. Earlier this year, Trump, now re-elected, even threatened to fire Fed Chairman Powell.
During the Fed’s press conference following Thursday’s rate decision, Powell was clear: “No,” he replied when asked if he would be willing to step down if Trump demanded it. When a Politico journalist followed up, asking if he was legally obligated to comply, Powell calmly repeated, “No.” He later briefly clarified: “Not permitted by law.”
However, Trump does not seem inclined to accept this. “I made a lot of money, was successful, and believe my instincts are better than those of the Fed and its current chairman,” he said in August. For Trump, monetary policy is all about “gut feeling.”
Legal Battle
Whether Powell can truly ignore Trump’s demands is less straightforward than it appears, specialists say.
On the first day of a new term, Trump could attempt to remove Powell from his position as Fed chairman. Legally, however, a Fed board member can only be dismissed “for cause”. With congressional support, Trump could seek to amend this law.
“That law, specifically Article 10, couldn’t be vaguer on this point,” says Edin Mujagic, monetary economist and fund manager at Hoofbosch. The law doesn’t define what constitutes ‘cause,’ meaning the US Supreme Court would likely have the final say.
“In the US, judges typically interpret ‘cause’ as neglect of duties or fraud. It’s highly uncertain whether they would view a disagreement between the president and the Fed over interest rates as sufficient grounds for Powell’s dismissal,” Mujagic notes.
Even if Trump were to win such a case, he would likely be limited to appointing a new chair from the current Fed governors, according to David Wilcox of the Peterson Institute for International Economics.
A more drastic move would be for the president to subject the Fed entirely to his authority by embracing a legal theory that has gained popularity among some conservative jurists. According to this “unitary executive theory,” independent agencies like the Fed are unconstitutional, because Article II of the US Constitution states that “the executive power shall be vested in a President of the United States,” Wilcox explains.
Market Turbulence
Investors should be under no illusions, warns Sylvester Eijffinger, emeritus professor of financial economics at Tilburg University. According to him, Trump will carry out his plans, and “it won’t take long before the market realises this.”
Trump’s determination is a concern within the Fed, Eijffinger adds. For the first time, an anti-establishment president with support in both the House and Senate poses a real threat to the independence of the US central bank.
To limit market turbulence, Trump’s economic adviser Scott Bessent is considering appointing a “shadow chairman” within the White House to provide commentary on Fed policy.
Wilcox sees this as a likely step. Although this figure would lack decision-making power, markets would closely follow their statements, potentially causing tensions with the current and future Fed chair.
Risk of Market Corrections Potentially High
Various Fed-watchers acknowledge the risks of interference, though many doubt it will go that far. Any threat to the Fed’s independence could have serious implications for the financial markets, especially the US bond market, presenting a political risk for the president.
“The question is what Trump would gain by dismissing Powell in 2025 rather than simply waiting until the first half of 2026,” Mujagic says. “Powell’s term as chairman expires in spring 2026, and Trump only needs to decide not to reappoint him to replace the Fed chair.”
Despite Trump’s criticism, the Fed under Powell is now pursuing a policy that aligns with Trump’s preference: lowering interest rates.
Not a New Phenomenon
Political pressure on the Fed is nothing new. When the Federal Reserve was established in 1913, the Secretary of the Treasury and the chief financial regulator were on the board. It wasn’t until 1951 that the Fed gained some independence, although political pressure continued. In 1972, for example, Nixon tried to persuade Fed Chairman Burns to adopt policies that would aid his re-election.
This interference contributed to the high inflation and economic stagnation of the 1970s, ultimately leading to steep interest rate hikes under Fed Chairman Paul Volcker to restore stability.
“It’s one of the most important financial laws in the US. I suspect that some representatives and senators see the dangers of tampering with the Fed’s status and consider it undesirable,” says Mujagic.