If the Federal Reserve loses its independence, how great is the market risk?

Can Trump Fire Powell?

On April 21, JPMorgan Chase released a research report stating that Trump frequently criticized Federal Reserve Chairman Powell during his first term. He previously attempted to influence the Fed's decisions through social media and other means, but the effect was not significant and did not greatly impact the Fed's independence. Now he seems to want to more directly align the Fed's actions with his wishes.

Whether Powell is fired depends largely on the attitude of the Supreme Court. If the Supreme Court dismisses the government's appeal, Powell's position as a governor will be secured. If the Supreme Court supports the current administration, Trump could freely fire Federal Reserve governors, even replacing the entire board, and may refuse to re-certify the presidents of the reserve banks next February, resulting in all FOMC members becoming loyal to the government.

However, the consequences of such actions are severe. On one hand, it is beneficial for monetary policy to be independent of political cycles, as politicians may stimulate the economy for short-term gains, leading to long-term economic issues. Moreover, a more independent central bank has better inflation control; historically, political interference has triggered uncontrollable inflation.

On the other hand, weakening the Fed's independence will increase inflation risks. Current inflation is already affected by tariffs and other factors; if further political interference occurs, the market will demand higher inflation compensation, leading to rising long-term interest rates, which will suppress the economy and worsen fiscal conditions. Despite the serious consequences, Trump may still insist on intervening.

Structure and Power Distribution of the Federal Reserve

The Federal Reserve's interest rate policy is set by the Federal Open Market Committee (FOMC). The FOMC consists of 12 members, including 7 members of the Federal Reserve Board (nominated by the president and confirmed by the Senate), the president of the New York Fed, and 4 rotating chairs from the other 11 regional Federal Reserve banks each year. The full term for board members is 14 years, with a new term starting every two years. Members filling uncompleted terms can be reappointed for a new 14-year term.

The chair and vice-chair of the Federal Reserve Board are nominated by the president from among the board members and confirmed by the Senate. Their term is four years and can be renewed by the president. After the four-year term ends, the chair or vice-chair can theoretically continue to serve as an ordinary board member to complete the remaining term, but historically this situation is rare, except for Marriner Eccles in the late 1940s.

It is noteworthy that unlike the Federal Reserve Board, the chair and vice-chair of the FOMC are elected by FOMC members, not appointed by the president. Although historically the committee usually elects the board chair to serve as the FOMC chair, neither the board chair nor the FOMC chair has formal powers greater than those of ordinary governors or FOMC members. The chair presides over meetings and represents the Federal Reserve in reporting to Congress. However, most of the chair's power comes from the historical respect typically accorded to the chair by the board or FOMC.

Figure 1 Term of Board Members and Chair Positions (The position of Vice Chair for Supervision is currently vacant) From the above table, it can be seen that Powell's term as chairman will end in May 2026, and his term as a governor will end in January 2028.

The presidents of the 12 regional Federal Reserve Banks are elected by the boards of directors of each bank, but they need to be reviewed and approved by the Federal Reserve Board. The terms of all 12 presidents must be re-certified every five years, with the certification occurring in February of years ending in 1 or 6. This means that in February 2026, the Federal Reserve Board will vote to decide whether these regional bank presidents will continue to serve. However, historically, this re-certification process has usually been a formality and lacks substantive significance.

Possible Paths for the Government to Weaken the Independence of the Federal Reserve

Under normal circumstances, the president's influence on Federal Reserve policy mainly manifests through the appointment of members to the Federal Reserve Board. However, as shown in the above chart, even if Powell leaves the Board after completing his term as chairman next year, the president's influence on the composition of the Federal Reserve Board during his remaining term is quite limited, as other members like Waller also have long terms. Most governors typically do not serve the full 14-year term and often leave early for personal reasons, so if the president is patient, there may still be opportunities to fill vacancies on the Board.

The president can also attempt to influence monetary policy through other indirect means. Historically, Federal Reserve chairmen have met with the president, but the frequency of such meetings has gradually decreased. Moreover, as was the case during Trump's first term, the president can publicly express his views on monetary policy through social media or other channels in an attempt to influence the Federal Reserve. However, during that period, it was widely believed that the Federal Reserve's decisions were primarily based on economic conditions rather than presidential influence.

Recently, Trump stated on social media that "firing Powell is urgent!" Coupled with the remarks from White House National Economic Council Chairman Hassett last Friday, this has intensified speculation that the president will attempt to remove Powell from his position as a Federal Reserve governor or chairman, or both. However, the seven Federal Reserve governors can only be removed for "just cause," which has historically been understood to mean misconduct or dereliction of duty, rather than policy disagreements.

In the 1935 "Humphrey’s Executor" case, the U.S. Supreme Court unanimously ruled that the president cannot dismiss members of the Federal Trade Commission (FTC) protected by "just cause" due to political disagreements. Since then, most people believe that this case has resolved the issue of job security for Federal Reserve governors.

The job security of Federal Reserve governors should help ensure the independence of the Federal Reserve and its monetary policy. However, the current administration is testing whether the current Supreme Court will uphold the precedent set in the "Humphrey’s Executor" case. Recently, the government dismissed two members of independent agencies, namely the National Labor Relations Board (NLRB) and the Merit Systems Protection Board (MSPB). Lower courts have ruled these dismissals illegal, the government has appealed, and the Supreme Court has decided to hear the appealBased on this, there are several possible paths.

First, if the Supreme Court supports the current government. The government could arbitrarily dismiss Federal Reserve governors, and may even replace the entire board with pro-government individuals. By February next year, such a board might refuse to re-certify the presidents of the reserve banks, resulting in all 19 FOMC members becoming loyalists to the government within a year.

Second, the Supreme Court may rule in favor of the government in cases involving the National Labor Relations Board (NLRB) and the Merit Systems Protection Board (MSPB), but treat the Federal Reserve as an exception, protecting the independence of the governors.

Third, if the Supreme Court directly dismisses the government's appeal, Powell's position as governor would be preserved.

However, the third scenario still raises the question of whether the government can demote Powell from the chairmanship. Although there has been no historical precedent for this, unlike ordinary directors, the Federal Reserve Act does not explicitly provide "just cause" protection for the positions of chair or vice-chair. Morgan speculates that former regulatory vice-chair Barr may have proactively stepped down from the vice-chair position to avoid becoming a test case.

If the government successfully pursues this route and Powell is demoted, even if the president hopes Powell will leave the Federal Reserve entirely like former chairs such as Eckles, Powell could choose to remain as a governor until the last year of the president's term. This would not only hinder the government's ability to nominate another governor but Powell could even be selected as the FOMC chair, continuing to influence monetary policy. As mentioned above, while the explicit powers of the board or the FOMC are limited, historically, the chair usually receives great respect from other committee members.

Political interference may drive up inflation, suppress the economy, and worsen fiscal conditions

Economists generally believe that removing monetary policy from the political cycle is beneficial. Otherwise, the short-term vision of election schedules may tempt politically oriented monetary policymakers to attempt to stimulate the economy inappropriately from a long-term perspective.

International experience shows that central banks with stronger political independence tend to maintain lower and more stable inflation. Historical records indicate that political interference led to poor monetary policy in the late 1960s and early 1970s, adversely affecting inflation developments.

Any weakening of the Federal Reserve's independence would increase the upward risks to an inflation outlook already facing upward pressure due to tariffs and rising inflation expectations. Additionally, market participants may demand higher inflation risk compensation, thereby pushing up long-term interest rates, suppressing economic activity prospects, and worsening the fiscal situation in the United States. It was hoped that these adverse consequences would deter the president from threatening the independence of the Federal Reserve; however, so far, the president has often insisted on his intentions