Macro Signposts | 23 April 2025
This week, I asked Libby Cantrill, PIMCO's head of public policy, to coauthor Macro Signposts and discuss the outlook for Federal Reserve independence amid pressure from the Trump administration.
Challenges to Fed Independence
By Libby Cantrill and Tiffany Wilding
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.
Legal scholars have suggested there are pathways for the Supreme Court to rule more narrowly and carve out the Federal Reserve, at least in its ability to independently implement monetary policy. It's possible the Supreme Court may allow the firing at the NLRB (asserting that people who adjudicate labor issues are effectively "executing the law" and therefore employed at the will of the executive branch) but also decide that the Fed's role in setting monetary policy sets it apart from other independent federal agencies. Congress holds the power to regulate the value of money, which could imply the Fed's pursuit of its monetary policy goals is a quasi-legislative (not executive) function.
Justice Samuel Alito, one of the Supreme Court's most conservative justices, argued in 2023 that the Fed was different, calling it a "unique institution with a unique historical background" that made it different from other independent bodies. The case for carving out the Fed could hinge on Alito's ability to convince the court's other conservative justices.
Ironically, the White House affirmed that the Fed's monetary policy role was different as recently as February: A sweeping executive order that placed several financial regulatory agencies, including the Fed, more directly under the president's control made an exemption for the Fed's ability to set interest rates.
What would the Trump administration actually gain in firing Powell, if it could?
The disruption to not only U.S. but global capital markets that would likely follow if the president could (at will) fire the Fed chair or governors likely wouldn't be worth whatever short-run gains that might accrue from a lower policy rate. A linchpin in the decades-long anchoring of U.S. inflation expectations, and in investor perceptions of U.S. capital markets as a safe store of value, is the Fed's independence from political influence - it's what allows the Fed to make potentially painful adjustments in an effort to ensure longer-term price stability and full employment. If that independence is lost - regardless of whether the president actually uses the power to fire Fed officials - then the U.S. Treasury market's special global status would also likely be eroded, potentially pressuring bond yields higher and the dollar lower.
Furthermore, to directly change monetary policy, the president would have to fire more Fed officials than just the chair. Monetary policy decisions are made collectively by the Federal Open Market Committee (FOMC), which consists of the seven Fed Board governors plus the president of the New York Fed and four other rotating regional Fed presidents. Powell is the chair of the FOMC, and John Williams of the New York Fed is the vice chair.
Rate cuts or hikes are a majority decision by all 12 members of the FOMC. If Powell were demoted from the FOMC chair position or fired entirely, then the FOMC would quickly vote to establish a new chair. The new FOMC chair could be Williams, but that is not a guarantee. There also would be no guarantee that whomever the FOMC elects as the new FOMC chair would advocate to lower rates more quickly. The same likely applies to another potential Fed chair nominee, Chris Waller (a 2020 Trump appointee), who appears to have more traditional views of monetary policy.
Moreover, securing confirmation as Fed chair requires 50 votes in the Senate, and several Republican senators seem to support an independent Fed. Perhaps a coalition of Republican senators, including former Majority Leader Mitch McConnell (R-KY), might hesitate to confirm a replacement for Powell or other governors.
It's worth noting that if one of the Trump administration's goals is lower interest rates for the real economy, then firing Powell might hinder, not help. Consider how the yield on the 10-year U.S. Treasury, which often informs mortgage and other lending rates, rose in the initial wake of the recent Powell rhetoric.
Rhetoric versus reality
We have mentioned before that Trump's tendency to push norms - and the law, in some cases - is "more feature than bug," meaning the administration expects that some, though not all, of its policy shifts will endure legal and political challenges. Some in the White House are said to be skeptical of the Humphrey's Executor decision and are interested in testing it, with potential implications for Fed independence.
However, from the Trump administration's perspective, Powell seems to play an important role as a boogeyman. For instance, it is easier to blame Powell for a market sell-off rather than the administration's policies, and in that sense, Powell is likely much more useful to Trump as the sitting Fed chair than not.
Bottom line
Our view is that despite the rhetoric and the amplified pressure on Powell, it is still unlikely that Trump pulls the trigger and fires Powell. Trump himself said as much on Tuesday afternoon. Also, there are good reasons to believe that the Supreme Court would leave the Fed's special status as an independent agency intact. We don't think the legal fight or the market pain (particularly in the bond market) is worth it for the administration even if the court leaves some ambiguity.
Nevertheless, the fact that investors are even discussing this question is a troublesome sign. Powell's term as chair is up in May 2026 (and as a member of the board in January 2028), so in about a year Trump will be able to start reshaping the Fed from the top. Even a remote chance that a president could fire a sitting Fed chair or governor is an unsettling development for markets. Indeed, it may continue to make dollar-based investors more weary and wary, driving diversification from U.S. assets, even if important monetary policy norms remain.
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