Background on Jerome Powell and the Federal Reserve
Jerome Powell, the current Chair of the Federal Reserve (Fed), has been at the center of a growing conflict with U.S. President Donald Trump. The Fed, established over a century ago, is designed to be independent from political influences. The President’s power of appointment for key positions is limited and requires Senate confirmation.
Trump’s Demands for Lower Interest Rates
Even before Trump’s trade war escalated and affected the U.S. economy, he persistently urged the Fed to lower interest rates in order to stimulate growth. However, Powell’s determination to make decisions based on economic conditions rather than political pressure has heightened Trump’s frustration.
Open Conflict Between the White House and the Fed
The tension between Trump and Powell intensified this week when the President threatened to remove the Fed Chair, potentially undermining the independence of the U.S. central bank. Powell, whose second term ends in May 2026, has stated that the independence of the Fed is “guaranteed by law” and has dismissed any early resignation talks.
Experts’ Views on Trump’s Threats
Most experts agree that Trump lacks the legal authority to remove Powell or other key Fed members. They warn that a serious threat to the Fed’s independence could come through ongoing legal challenges against a 1935 Supreme Court precedent that prevents the President from dismissing heads of independent government agencies.
Market Reactions and the Importance of Fed Independence
Even if Trump were to succeed in challenging this precedent, the bond market could pose a final hurdle. Recent market turbulence caused by Trump’s trade war has shown that investors might lose confidence in the U.S. as a safe haven for capital, causing bond yields to rise and the dollar to fall.
Should investors perceive a threat to the Fed’s independence, it could lead to increased risk premiums on U.S. debt, putting additional pressure on the Trump administration. As KPMG Chief Economist Diane Swonk emphasizes, “You can’t control the bond market. That’s why an independent Fed is crucial.”
Key Questions and Answers
- What is the Federal Reserve (Fed)? The Fed is the central banking system of the United States, established over a century ago to provide a safer, more flexible, and stable monetary and financial system.
- Why is the independence of the Fed important? An independent Fed helps maintain stable prices, moderate long-term interest rates, and promote maximum employment. It prevents political interference that could lead to unstable economic conditions.
- Can Trump legally remove Jerome Powell from the Fed? No, most experts agree that Trump lacks the legal power to remove Powell or other key Fed members due to the institution’s independence and existing laws.
- What are the potential consequences of Trump’s threats against the Fed? Trump’s actions could undermine investor confidence, increase bond yields, and put additional pressure on the U.S. economy.
