The ongoing tension between President Donald Trump and Federal Reserve Chair Jerome Powell has intensified as the Supreme Court considers a case that may simplify the process for the president to dismiss the Fed chief. These developments occur amidst economic and financial market upheaval, largely driven by Trump’s comprehensive tariffs on imports. Economists express concern that undermining the Fed’s traditional independence from political influence could exacerbate market disruption and increase economic uncertainty.
In remarks made at the White House, President Trump indicated that he believes he possesses the authority to remove Powell and criticized the Fed Chair for not adopting a more aggressive approach to cutting interest rates. This scrutiny poses a threat to the cherished independence of the Federal Reserve, an institution whose impartiality has long been valued by economists and Wall Street investors alike.
The Federal Reserve holds substantial influence over the U.S. economy. By adjusting the short-term interest rate, it can either stimulate growth and employment by making borrowing more affordable or, conversely, it can restrain the economy to curb inflation by making borrowing costlier. The importance of an independent central bank gained prominence following the inflation surge of the 1970s and early 1980s, a period largely attributed to former Fed Chair Arthur Burns yielding to President Richard Nixon’s pressure to maintain low rates.
Wall Street investors generally favor an independent Fed as it is perceived to manage inflation more effectively without political interference, offering more predictable decision-making. A move to dismiss Powell could trigger a downturn in stock prices and increase bond yields, subsequently raising borrowing costs for various loans and credit obligations.
Despite its independence, the Federal Reserve is not entirely unaccountable. The president appoints the Fed Chair along with other board members, subject to Senate confirmation. These appointments enable a president to significantly influence the Fed’s policy over time. Congress also plays a role by setting the Fed’s objectives, such as the mandate to maintain price stability and maximize employment.
There is ongoing debate about the president’s authority to fire the Fed Chair. The law establishing the Federal Reserve does not explicitly allow for the dismissal of a chair without cause. While legal scholars mostly agree that Trump cannot remove Powell from the Fed’s board of governors, opinions are divided on whether the president can dismiss him as chair. Any move to do so would likely culminate in a Supreme Court battle.
The Supreme Court is set to rule on a related case, which could provide insights into whether the president has the authority to dismiss officials from independent agencies. Previously, the court upheld Trump’s dismissals of officials from independent agencies, pending a final decision. The outcome could potentially overturn precedent and extend presidential powers over agency heads, but the Federal Reserve might be exempt from these changes due to its unique status and historical background.