President Donald Trump attacked Federal Reserve Chair Jerome Powell on Thursday for not cutting interest rates. "I'm not happy with him," Trump said while taking questions from reporters during a visit with Italian Prime Minister Giorgia Meloni.
The US President said that he could fire him if he wanted to, renewing a threat from his first term that could cause a major legal showdown over the issue of the central bank's long-standing political independence.
Trump's comments followed a posting on his social media site in which the Republican president called on Powell to lower the Fed's short-term interest rate and said, "Powell's termination cannot come fast enough!"
The Fed chair's term ends in May 2026.
Powell was initially nominated by Trump in 2017 and was appointed to another four-year term by Democratic President Joe Biden in 2022.
At a November news conference, Powell indicated he would not step down if Trump asked him to resign and, in remarks Wednesday, made clear that "our independence is a matter of law." He added: "We're not removable except for cause. We serve very long terms, seemingly endless terms."
What stops the Fed from cutting the key interest rates?
Trump's criticism stems from his view that, as he said Thursday, "we have essentially no inflation." The Fed sharply raised rates in 2022 and 2023 to slow borrowing and spending and tame inflation, which dropped steadily from a peak of 9.1% in 2022 to 2.4% last month. Inflation is not far from the Fed's target of 2%. The Fed even cut rates three times at the end of last year.
But since then, Powell and most other Fed policymakers have underscored that they are keeping rates on hold because of the uncertainty created by Trump's sweeping tariffs, including a 10% tax on all imports and a 145% levy on imports from China.
In remarks Wednesday in Chicago, Powell reiterated that the Fed was waiting for greater clarity before making any moves and said the tariffs would likely worsen inflation.
Why does the Fed's independence matter?
The Fed wields extensive power over the US economy. By cutting the short-term interest rate it controls, which it typically does when the economy falters — the Fed can make borrowing cheaper and encourage more spending, accelerating growth and hiring. When it raises the rate — which it does to cool the economy and combat inflation — it can weaken the economy and cause job losses.
Economic research has suggested an independent central bank is more likely to keep inflation in check because it is more willing to do unpopular things, such as lift interest rates, to fight rising prices.
An effort to fire Powell would almost certainly cause stock prices to fall and bond yields to spike higher, pushing up interest rates on government debt and raising borrowing costs for mortgages, auto loans, and credit card debt.
Most investors prefer an independent Fed, partly because it typically manages inflation better without being influenced by politics but also because its decisions are more predictable.
The importance of an independent Fed was cemented for most economists after the extended inflation spike of the 1970s and early 1980s. Former Fed Chair Arthur Burns has been widely blamed for allowing the painful inflation of that era to accelerate by succumbing to pressure from President Richard Nixon to keep rates low heading into the 1972 election. Nixon feared higher rates would cost him the election, which he won in a landslide.
Paul Volcker was eventually appointed chair of the Fed in 1979 by President Jimmy Carter, and he pushed the Fed's short-term rate to the stunningly high level of nearly 20%. (It is currently 4.3%). The eye-popping rates triggered a sharp recession, pushed unemployment to nearly 11%, and spurred widespread protests.
Yet Volcker didn't flinch. By the mid-1980s, inflation had fallen back into the low single digits. Volcker's willingness to inflict pain on the economy to throttle inflation is seen by most economists as a key example of the value of an independent Fed.
'We're never going to be influenced by any political pressure'
Powell said Wednesday that the Fed will base its decisions solely on what's best for all Americans.
"That's the only thing we're ever going to do," Powell said. "We're never going to be influenced by any political pressure."
He also suggested that the central bank will focus on fighting inflation in the wake of the tariffs, which would likely mean they would keep rates elevated.
Trump complained that interest rates are still rising "because we have a Federal Reserve chairman that is playing politics." Yet longer-term rates rose after Trump announced his trade penalties.
Trump and members of his economic team have said they would like longer-term interest rates to fall, which would make it cheaper for Americans to borrow to buy homes, cars and appliances. Yet the Fed controls a short-term rate and can only indirectly affect longer-term borrowing costs.
Could Trump really remove the Fed's Chair?
Powell says the law establishing the Fed does not allow a president to fire a chair except for cause. There is some complication in that Powell was separately appointed as a member of the Fed's board of governors, and then elevated to the position of chair — by Trump, in 2017.
Most legal scholars agree that Trump can't fire Powell from the Fed's board of governors, but there is less agreement over whether a president can remove him as chair.
Should Trump try to fire Powell anyway, the ensuing fight would almost certainly end up at the Supreme Court.
We may get an early sign of how the Supreme Court would decide it this summer. There is already a case before the court on the issue of whether the president can fire top officials at independent agencies.
Powell said he is watching the case closely but that it might not apply to the Fed, given that the court has in the past carved out exemptions for the central bank. Lawyers for the Trump administration, seeking to narrow the focus of the case, have also argued that it does not involve the Fed.
In a 2024 campaign interview with Bloomberg News, Trump said he would allow Powell to serve out his term as chair. Earlier this month, Trump's top economic adviser, Kevin Hassett, said in a television interview that "there's not going to be any political coercion over the Fed, for sure."
Powell started Trump's second term in a relatively secure spot with a low unemployment rate and inflation progressing closer to the Fed's 2% target, conditions that could have spared him from the president's criticism.
But Trump's tariffs have increased the threat of a recession with higher inflationary pressures and slower growth, a tough spot for Powell, whose mandate is to stabilise prices and maximise employment. With the economy weakening because of Trump's moves, the president appears to be looking to pin the blame on Powell.
On 2 April, Trump rolled out increased tariff hikes based on US trade deficits with other nations, causing a financial market backlash that almost immediately led him to announce a 90-day pause.
Now, most economists worry that an assault on the Fed's longstanding independence from politics would further disrupt markets and add to the uncertainty enveloping the economy.
Wall Street banks such as Goldman Sachs have raised their odds that a recession could start. Consumers are increasingly pessimistic in surveys about their job prospects and fearful that inflation will shoot up as the cost of the import taxes gets passed along to them.
The Budget Lab at Yale University estimated that the increased inflationary pressures from the tariffs would be equal to the loss of $4,900 (€4,308) in an average US household.
