Is it not easy for Trump to replace Powell? A detailed explanation of the stability of the Federal Reserve Chair position

Despite Trump's continuous criticism of Powell for not lowering interest rates and his remarks about possibly replacing the Federal Reserve Chairman, it is actually not easy to replace Powell, as the legal and institutional framework provides multiple protections for the Federal Reserve Chairman.

This Wednesday, rumors about Trump possibly firing Federal Reserve Chairman Powell triggered significant market fluctuations within just one hour. As noted in a previous article by Jianwen, this clearly demonstrates the financial shocks that may arise when the independence of the Federal Reserve is subject to political interference, exposing the market's sensitivity to the risks of monetary policy independence.

On July 18, according to news from the Chase trading desk, JP Morgan recently pointed out in a research report titled "How safe is Powell’s job?" that despite political pressure, multiple legal and institutional safeguards make Powell's position relatively stable.

JP Morgan economist Michael Feroli detailed the legal protections of Powell's position in the report, stating that the Supreme Court's ruling in Trump v. Wilcox provides special protection for the Federal Reserve, clearly stating that "the Federal Reserve is a uniquely structured quasi-private entity," which provides legal grounds for Federal Reserve Board members to be protected from the President's "arbitrary dismissal."

In addition to the legal barriers providing multiple protections for Powell, JP Morgan also pointed out in the research report that the governance structure of the Federal Reserve limits the President's influence over monetary policy.

Legal Barriers Provide Multiple Protections for Powell

JP Morgan economist Michael Feroli noted in the report that under the Federal Reserve Act, Federal Reserve Board members can only be removed for "cause," which has historically been understood as misconduct or dereliction of duty, rather than policy disagreements.

In the 1935 case Humphrey's Executor v. United States, the Supreme Court unanimously ruled that the President cannot remove members of the Federal Trade Commission who enjoy "for cause" protection due to political disagreements.

The "Humphrey's Executor" case is an important precedent set by the U.S. Supreme Court in 1935. This case established the principle that the President cannot arbitrarily dismiss heads of independent regulatory agencies due to policy disagreements. This precedent has long protected independent agencies like the Federal Reserve from direct political interference by the President.

JP Morgan emphasized that most importantly, the Supreme Court's ruling in May in Trump v. Wilcox provides the Federal Reserve with a special status.

According to the Supreme Court ruling, in the case "Trump v. Wilcox," the court approved President Trump's removal of two Democratic officials from the National Labor Relations Board (NLRB) and the Merit Systems Protection Board (MSPB), despite the lack of legitimate grounds for dismissal, stating it was part of the exercise of presidential executive power. However, the majority opinion of the Supreme Court specifically stated:

"The Federal Reserve is a uniquely structured quasi-private entity that continues the unique historical traditions of the First and Second Banks of the United States." This grants the Federal Reserve a special status, protecting its board from "arbitrary dismissal."

Even if Trump attempts to dismiss Powell with "just cause," the current discussion revolves around the issue of cost overruns in the renovation of the Federal Reserve headquarters.

However, JP Morgan points out that historically, there is a lack of precedent for defining the boundaries of "just cause" for dismissing independent agency heads, and if the government chooses this path, it could lead to a lengthy legal process, which is not good news for the market.

According to a previous article by Jianwen, if Trump were to actually dismiss Powell rather than merely pressuring him to resign, Powell would likely file a lawsuit to block this action, and the case would likely end up in the Supreme Court.

One scenario speculated by analysts is that the Supreme Court might allow lower courts to keep the injunction against Trump's dismissal of Powell in effect during the case proceedings. Wolfe Research stated, "This is likely sufficient for him to complete his term as chairman."

Institutional Design Limits Presidential Influence on Monetary Policy

The institutional design of the Federal Reserve itself limits the president's direct influence on monetary policy.

The Federal Open Market Committee (FOMC) consists of 12 members: 7 board members, the president of the New York Federal Reserve, and 4 rotating regional Federal Reserve presidents. This structure disperses decision-making power, making it difficult to immediately change policy direction even with personnel changes.

The 7 board members are nominated by the president and confirmed by the Senate, serving 14-year terms. The chairman and vice chairman of the Federal Reserve are nominated by the president from among the board members, confirmed by the Senate, and serve 4-year terms, which can be renewed. Powell's board term lasts until January 2028, and his chairmanship term lasts until May 2026.

JP Morgan states that even if Powell were stripped of his chairmanship, he could remain as a board member until January 2028 and could even be elected as the committee chairman by the FOMC, thereby maintaining actual leadership in monetary policy formulation. This arrangement would prevent the government from appointing new board members and could maintain the continuity of monetary policy.

From a personnel perspective, Trump's ability to influence the composition of the Federal Reserve through normal personnel appointments during his remaining term is limited. According to the current board term arrangements, most board members are unlikely to leave during their full 14-year terms, usually for personal reasons, which gives the president some patience to wait for vacancies.

Erosion of Independence Will Increase Inflation Risks

Research reports indicate that economists generally believe it is beneficial to separate monetary policy from political cycles. The short-term perspective of election schedules may tempt politically oriented monetary policymakers to stimulate the economy at inappropriate times.

International evidence suggests that central banks with greater political independence tend to promote lower and more stable inflation Historical records show that political interference led to poor monetary policy in the late 1960s and early 1970s, which had adverse consequences for inflation development.

Any weakening of the Federal Reserve's independence could increase the upside risks to the inflation outlook, which is already facing upward pressure from tariffs and slightly elevated inflation expectations.

Moreover, market participants may demand greater compensation for inflation and inflation risks, thereby pushing up long-term interest rates, dragging down the economic activity outlook, and worsening fiscal conditions