Trump changed his mind, partly because Treasury Secretary Mnuchin and Commerce Secretary Ross privately warned him that firing Powell could trigger market turmoil and legal disputes.
Written by: Fang Jiayao, Wall Street Insights
Despite Trump's escalating criticism of Powell last week, he publicly stated on Tuesday that he does not plan to fire Powell and accused the media of misrepresenting his intentions.
On April 23, Eastern Time, media outlets cited sources saying that the White House took Trump's public criticism of Powell very seriously, with even a White House lawyer privately researching the legal options for firing Powell, including whether he could be dismissed for "just cause," as under the law, Federal Reserve governors can only be removed for just cause before their term ends, and courts typically interpret "just cause" as misconduct or malfeasance.
Additionally, Trump's change of heart is related to Treasury Secretary Mnuchin and Commerce Secretary Ross, who warned him that firing Powell could lead to market turmoil and legal disputes. Ross told Trump that firing Powell would not change interest rates, as other members of the Federal Reserve might maintain a monetary policy similar to Powell's.
The market votes with its feet, Trump abandons the firing
Media pointed out that Trump's statement of "not planning to fire Powell" indicates that he and his advisors are still closely monitoring Wall Street and the reactions of large corporations.
Although Trump insists he is not influenced by market fluctuations, he and his advisors are clearly aware of the market's resistance to his aggressive trade and economic measures and are gradually making compromises. After all, White House spokesperson Taylor Rogers has stated that presidential advisors provide recommendations, but the ultimate decision-maker remains the president himself.
Tesla CEO Elon Musk stated during Tuesday's earnings call that he would advocate for lower tariffs in his discussions with the president. Musk said, "Whether he takes my advice is up to him." Due to Tesla's declining stock price, he will reduce his work time on DOGE, and Tesla's global sales have also declined due to Musk's relationship with the government.
During his first term, Trump frequently criticized Federal Reserve Chairman Powell and attempted to influence Federal Reserve decisions through social media, but the effects were limited and did not substantively impact the Fed's independence. However, concerns about the Fed's independence have significantly escalated this time, primarily for two reasons.
First, Trump is more inclined to challenge institutional and legal norms in his second term. The U.S. Department of Justice is attempting to overturn a 90-year-old legal precedent that prevents Federal Reserve officials from being dismissed before their terms expire, which many legal experts believe, if overturned, would severely threaten the Fed's independence.
Second, due to the scale of Trump's tariffs far exceeding those in his first term and their broader scope, this could exacerbate inflation issues this year. Trump's tariff policies undoubtedly make it more challenging for the Federal Reserve to balance inflation and economic growth.
The cost of firing Powell is too high and the effect is limited
In reality, Trump faces significant resistance to firing Powell.
On one hand, the independence of the Federal Reserve is viewed by bond investors as a crucial pillar of the U.S. financial system. Many investors believe that the Federal Reserve should not be subject to government interference. If foreign investors worry that the U.S. government will intervene in the Fed to tolerate higher inflation levels, they may reduce their purchases of U.S. Treasuries, thereby driving up interest rates.
Former senior advisor and chief economist at the San Francisco Fed, Tim Mahedy, stated last week that if Trump successfully forces the Fed chairman to step down, the market's reaction would be catastrophic. The pain would come so quickly and severely that the president would be forced to immediately retract his commitment, or face a systemic financial crisis.
On the other hand, many Wall Street analysts believe that even if Trump fires Powell, it would not easily change the Federal Reserve's monetary policy, as other governors may not support a rate cut. For example, last month, Trump promoted Federal Reserve Governor Bowman, whom he appointed during his first term, to Vice Chair for Bank Supervision. Bowman is one of the most outspoken officials at the Fed and has warned about the risks of premature or rapid rate cuts.
Powell has consistently stated that he does not believe the independence of the Federal Reserve is under threat. Powell believes that if a Fed chairman is fired due to policy disagreements, it would place significant pressure on future Fed chairs, potentially affecting their decision-making freedom. To protect the Fed chair's ability to make decisions without political pressure, Powell believes it is necessary to prepare for such potential legal conflicts, even if he personally may bear the costs.
The issue of Federal Reserve independence is not new
Since the high inflation of the 1970s, the Federal Reserve has placed great importance on its independence. At that time, President Nixon pressured the Fed to ease monetary policy, resulting in severe inflation. The high inflation issue was ultimately curbed through the economic recession of the early 1980s.
Although the independence of the Federal Reserve is not explicitly defined in legal terms, this historical lesson has led to a consensus among the Fed, the president, and Congress that the Fed should have considerable independence to ensure it can maintain low inflation and a healthy job market.
By the 1990s, many other countries' central banks also began to seek greater independence, allowing them to make interest rate decisions free from government interference, thereby better serving the long-term development of the economy.
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