Challenges to Fed Independence

Amid mounting risks to the U.S. economy, President Donald Trump last week renewed his criticism of Federal Reserve policy and of Fed Chair Jerome Powell. Trump has asserted Powell was “too late” in cutting short-term interest rates and that Powell “would be out real fast if I wanted him to.” National Economic Council (NEC) Director Kevin Hassett indicated that the president would “study” whether to replace Powell. On Monday, Trump labeled Powell a “major loser” and said he needs to lower rates “now” – and then on Tuesday afternoon, he told reporters he had no intention of firing Powell.

Concerns surrounding political pressures and challenges to independent monetary policy likely spurred the declines in U.S. stocks, U.S. Treasuries, and the dollar in the days following Trump’s criticism of Powell.

Meanwhile, Powell has indicated that he will not step down as chair or from the Fed until his term as chair is up in May 2026. Our view is that the Trump administration’s challenges are unlikely to sway Fed monetary policy or result in Powell’s ousting. From a practical standpoint, it’s also unclear what Trump would gain by removing Powell, even if he could do so. Nevertheless, the mere fact that this is being discussed is concerning, and upcoming Supreme Court rulings could have important implications for Fed independence. Even the slightest chance that the Fed’s institutional standing could shift is potentially impactful for U.S. capital markets and the dollar.

Can Trump fire Powell? The Supreme Court may weigh in

Fed independence is a relatively modern concept but reinforced by the experience in the 1970s when President Nixon pressured Fed Chairman Arthur Burns to keep rates low even amid signs of brewing inflation – inflation that eventually caused profound damage to the U.S. economy. Since then, Fed independence has been relatively sacrosanct and, at least implicitly, central to many market participants’ perceptions around the dollar’s reserve currency status and the “flight to quality” appeal of U.S. Treasuries.

No Fed chair has ever been fired by a president. The Fed asserts that Trump does not have the legal standing to fire Powell simply because they disagree about monetary policy. Fed officials cite the 1913 law creating the Federal Reserve, which stipulates that the seven Fed governors, including Powell, can only be fired for “cause,” which is generally interpreted as misconduct, such as fraud or negligence. Powell echoed this last week at the New York Economic Club: “We’re never going to be influenced by any political pressure. … Our independence is a matter of law.”

Although Trump did say on Tuesday that he has no intention of firing Powell, his administration appears keen to test the laws underpinning Fed independence. Recent firings at various independent agencies seem to have been geared to test the constitutionality of long-standing legal precedent.

Indeed, President Trump has now fired commissioners from the Federal Trade Commission (FTC) and the National Labor Relations Board (NLRB). These firings test not only the norms of Washington but also the law, as many legal scholars assert that those positions are protected by Congress and upheld by a 1935 Supreme Court case, Humphrey’s Executor v. United States. The case of Trump firing members of the NLRB looks like it will head to the Supreme Court and could be ruled on by late June, which will either uphold or overturn Humphrey’s Executor. If overturned, it would open the door for a president to fire not just the chair of Federal Reserve Board, but any Board Governor, for any reason, including policy disagreements.