Even if Trump "fires" Powell, the Federal Reserve is unlikely to "obey" and cut interest rates

According to media reports on Thursday, Trump has been discussing the possibility of firing Powell for months. Recently, U.S. President Trump met with former Federal Reserve Governor Kevin Warsh to discuss the potential early replacement of current Federal Reserve Chairman Powell. Some believe Warsh is a leading candidate to succeed Powell. Powell's current four-year term will end in May 2026.

Previously, Trump has repeatedly criticized Powell, stating that the Federal Reserve should have lowered interest rates long ago, and he claimed that his dismissal of Powell "isn't coming fast enough." Trump has repeatedly urged the Federal Reserve to cut interest rates.

The conflict between Trump and Powell seems to be becoming increasingly pronounced. Meanwhile, Powell's future faces growing uncertainty. On Monday, U.S. Treasury Secretary Mnuchin stated in an interview that he and Trump "have been considering" candidates for the next Federal Reserve Chairman and plan to start interviewing potential candidates in the fall.

Noted financial analyst Jim Bianco pointed out that Powell may face two fates—either being directly dismissed by the president or being effectively sidelined. It is reported that Mnuchin's alternative proposal last year was to establish a "shadow Federal Reserve Chairman," meaning appointing Powell's successor a few months in advance. This nominee could regularly appear on financial television programs, acting like a "paper quarterback" to criticize every speech and decision made by Powell, thereby undermining Powell's influence.

Nevertheless, a successor nominated by Trump may not have the authority to arbitrarily lower interest rates. This is because the Federal Reserve Board of Governors and the Federal Open Market Committee (FOMC/which sets interest rates) are effectively separate and do not have to be led by the same person. The FOMC has no legal obligation to elect the Chairman of the Federal Reserve Board (the colloquial term for the Federal Reserve Chairman) as the chair of the interest rate policy-making committee. They can simply elect someone else.

However, since the establishment of the FOMC in 1935, the Chairman of the Federal Reserve Board has always concurrently served as the Chairman of the FOMC to ensure that monetary policy aligns with the overall goals of the Federal Reserve; this is also for efficiency considerations, to avoid power dispersion and ensure policy coherence.

The main topic of discussion currently is whether Trump has the authority to fire Powell. U.S. legal precedents prevent the president from unilaterally dismissing heads of independent agencies (the U.S. Supreme Court ruled in the 1935 Humphrey's Executor v. United States case). However, the White House is seeking a Supreme Court review of this statute to clear the way for the agency.

But even if Trump were granted permission, and Powell completely left the Federal Reserve, the path to lowering interest rates would not be straightforward.

According to the Zhitong Finance APP, in what UBS Chief Economist Paul Donovan referred to as "extreme circumstances," the FOMC could elect someone other than the new Chairman of the Federal Reserve Board to serve as the FOMC Chairman The FOMC Chair is elected at the first meeting of each year. In the event of the FOMC Chair's departure, the election will take place at the next meeting.

In August 1979, then-Federal Reserve Chairman G. William Miller was appointed by President Carter as Secretary of the Treasury as part of a cabinet reshuffle. At the FOMC meeting on August 14 of the same year, Paul Volcker was elected as the new Chair of the FOMC.

Volcker was quickly appointed as Federal Reserve Chairman a week before the meeting. However, in the hypothetical scenario of Powell being dismissed, FOMC members might vote for someone other than Trump's carefully chosen successor, such as New York Fed President John Williams.

Media reports indicated that six years ago, during Trump's first term, when the possibility of Trump dismissing Powell arose, Federal Reserve leaders decided to "unite" and elected Powell as FOMC Chair. Moreover, Powell has stated that he would not leave if Trump asked him to. Therefore, in a stalemate, Powell may continue to serve as FOMC Chair during legal challenges.

Furthermore, to ensure that Trump's new appointee receives the FOMC Chair vote, a major personnel "reshuffle" at the Federal Reserve Board may be necessary (the president does not have the authority to appoint regional Fed presidents; they are nominated and appointed by the Board). Given concerns about global market reactions, this would be a potentially reputationally damaging action.

Ultimately, the FOMC Chair has only one vote in interest rate policy decisions. Although the position has the ability to pressure other voting officials, the entire FOMC seems unlikely to directly tear up their dot plot and begin significantly cutting interest rates as a result.

In this context, despite Trump's intentions, sources revealed that Waller also advised Trump not to fire Powell and not to interfere with his term; Bessen also stated that Powell should not be dismissed, arguing that the Federal Reserve losing its independence could impact global markets