Why did Trump suddenly "let go" of Powell? Thanks to Bessent and Lutnick

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 23rd, Eastern Time, media outlets cited sources saying that the White House had taken Trump's public criticism of Powell very seriously, with some White House lawyers privately exploring legal options for removing 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 Janet Yellen and Commerce Secretary Gina Raimondo, with insiders stating that they warned Trump that firing Powell could trigger market turmoil and legal disputes. Raimondo 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 idea of firing

Media reports 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 they are gradually making compromises. After all, White House spokesperson Taylor Rogers has stated that presidential advisors provide recommendations to Trump, 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 conversations 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.

Trump frequently criticized Federal Reserve Chairman Powell during his first term and attempted to influence Federal Reserve decisions through social media and other means, but with limited effect, failing to materially impact the Fed's independence. However, concerns about the market's perception of the Fed's independence have significantly escalated for two main reasons.

First, Trump is more inclined to challenge institutional and legal norms during his second term. The U.S. Department of Justice is attempting to overturn a 90-year-old legal precedent that serves as an important safeguard against the dismissal of Federal Reserve officials before their terms expire, and many legal experts believe that if this precedent is overturned, the Fed's independence will be severely threatened.

Second, Trump's tariffs are much larger and broader than during his first term, which could exacerbate inflation issues this year. Trump's tariff policies undoubtedly make it more difficult 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 numerous obstacles to firing PowellOn one hand, the independence of the Federal Reserve is seen by bond investors as an important pillar of the U.S. financial system. Many investors believe that the Federal Reserve should not be subject to government intervention. If foreign investors are concerned that the U.S. government will intervene with the Federal Reserve to tolerate higher inflation levels, they may reduce their purchases of U.S. Treasury bonds, thereby pushing up interest rates.

Tim Mahedy, a former senior advisor and chief economist at the San Francisco Federal Reserve, stated last week that if Trump successfully forces the Federal Reserve Chairman to step down, the market reaction would be catastrophic. The pain would come so quickly and severely that the president would be forced to immediately retract commitments, 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 members of the Federal Reserve Board may not support interest rate cuts. 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 Federal Reserve and has warned of the risks of premature or rapid interest rate cuts.

Powell has consistently stated that he does not believe the independence of the Federal Reserve is under threat. Powell believes that if the Federal Reserve Chairman were to be fired due to policy disagreements, it would place significant pressure on future Federal Reserve Chairs, potentially affecting their decision-making freedom. To protect the Federal Reserve Chairman'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, U.S. President Nixon pressured the Federal Reserve to ease monetary policy, resulting in severe inflation. The issue of high inflation was ultimately curbed through the economic recession of the early 1980s.

Although the independence of the Federal Reserve is not explicitly defined by law, this historical lesson has led to a consensus among the Federal Reserve, the president, and Congress that the Federal Reserve 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 set interest rates without government intervention, thereby better serving the long-term development of the economy