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The question of whether President Donald Trump has the power to dismiss Federal Reserve Chair Jerome Powell is currently under scrutiny, with a Supreme Court review of a nearly century-old case anticipated to frame the discussion by summer.
While legal experts prepare for the court’s ruling, market players are already reacting to the uncertainty surrounding the issue and expressing concerns that the independence of this crucial central bank could be jeopardized.
Regardless of the Supreme Court’s ultimate decision, Trump appears poised to assert his influence in this matter.
Trump’s Tensions with Powell
The volatility in the financial markets accelerated following President Trump’s tariffs announcement on April 2, dubbed “Liberation Day.” This announcement has already spurred significant fluctuations in both stock and bond markets.
In a subsequent address at the Economic Club of Chicago on April 16, Powell highlighted the uncertainties faced by the Federal Reserve. He remarked that the policy changes initiated by Trump’s administration are unprecedented and difficult to navigate. With the tariff increases surpassing initial expectations, the Fed faces potential conflict in meeting its dual mandate of maximum employment and stable prices.
Powell warned that with the slowdown in economic activity, unemployment is likely to rise, alongside possible inflationary pressures. The following day, Trump retaliated with a post on Truth Social suggesting that Powell should be ‘terminated’ and has continued to use social media to criticize him.
A series of reports from major news outlets have uncovered that discussions about Powell’s dismissal have been ongoing within Trump’s inner circle for months. In an April 17 report, the Wall Street Journal revealed Trump asserting in an Oval Office meeting that, “If I want him out, he’ll be out of there real fast, believe me.” Again on April 21, Trump took to Truth Social, criticizing Powell’s management of interest rate policies as detrimental to economic growth.
Since the tariffs were announced, the Dow Jones Industrial Average decreased by 9.6%, yielding significant increases in the 10-year U.S. Treasury note and a decline in the U.S. Dollar Index.
This situation evokes questions about the true extent of Trump’s influence over the Fed, suggesting that even the possibility of dismissal may already be affecting its perceived independence.
Market Reactions and Expert Insights
Experts like Felix Vezina-Poirier, a macro strategist with BCA Research, note that while Trump’s recent criticisms of Powell might heighten policy uncertainty, they are unlikely to culminate in Powell’s firing. Vezina-Poirier highlights the complexities and political risks involved in such a move, which would likely have counterproductive effects on financial markets by pushing long-term Treasury yields higher.
Moreover, Powell’s commitment to anchoring inflation expectations and maintaining the economy’s growth challenges Trump’s preference for looser monetary policies. The strategist predicts that replacing Powell could trigger a “bear steepening” in markets, indicating higher interest rates and increased inflation expectations.
The forex research team at Barclays reinforces this sentiment, warning that even a reduction in commentary regarding Powell may not alleviate bearish pressures on the Federal Reserve, potentially damaging confidence in the U.S. dollar.
The Supreme Court’s Role
As these dynamics unfold, the Supreme Court’s upcoming decision on Humphrey’s Executor v. United States assumes critical importance. This 1935 ruling provides safeguards for the heads of certain independent federal agencies—including the Fed—against being dismissed by the president without just cause, such as misconduct or gross incompetence.
The backdrop for the case includes Trump’s administration dismissing several individuals from independent executive agencies, leading to discussions about challenging this longstanding precedent. Legal experts, including Georgetown University’s Stephen Vladeck, indicate that the Court may be reevaluating this principle, given the changes in administration practices.
Vladeck believes that the justices will likely examine arguments for overturning Humphrey’s Executor closely but caution that doing so could threaten the autonomy of the Fed—an objective likely to find support across the Court. He anticipates that the fate of this critical precedent could soon be determined, potentially before the summer recess.
As these scenarios unfold, it seems likely that Trump will continue to address his views on Powell’s performance in the months ahead.
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