Even if Trump wants to “fire” Powell, he'd better not do it

This article was written by Kenneth Rogoff (Kenneth Rogoff), a former chief economist at the International Monetary Fund (IMF) and professor of economics and public policy at Harvard University.

US President-elect Trump unexpectedly caused a wave of anger in the media over almost any cabinet or staff appointment. Some of the sentiments can be attributed to deep-seated partisan bias, others reflect legitimate concerns, and others are simply nonsense.

However, when it comes to the US economy, the focus is on who Trump might fire rather than who he plans to appoint. Although Trump has stated that he will not seek to remove Federal Reserve Chairman Powell — whose term ends in May 2026 — there is no doubt that Trump would love to say to Powell, “You've been fired!”

Trump's animosity towards Powell is puzzling because Powell has always done a good job. Although on the surface his accomplishments were not as thrilling as SpaceX's booster landing, the extent to which the Federal Reserve successfully achieved a soft landing for the economy amid aggressive rate hikes is just as impressive. This delicate balancing act has only happened once before, in the 90s, when the Federal Reserve was headed by money guru Alan Greenspan (Alan Greenspan). Since a sharp rise in interest rates usually triggers a recession, economists generally consider the Federal Reserve successful when the resulting recession is mild or at least brief.

No US president has fired his appointed officials faster than Trump. Outgoing President Joe Biden, on the other hand, is the complete opposite; he did not fire any cabinet members. As far as the position of Federal Reserve chairman is concerned, Trump is considering replacing Powell — Kevin Warsh (Kevin Warsh), a highly respected former Federal Reserve member who has always been more hawkish than Powell.

Whether Trump fires Powell or not, he is trying to have more influence over the Fed's decisions, which could disrupt inflation expectations and push up long-term interest rates. Although this process may unfold more slowly than some activists might expect, the consequences may still be serious.

In the long run, any attempt by Trump to disrupt the independence of the Federal Reserve could seriously hinder its ability to cope with the economic and financial crisis. If inflation expectations are not firmly anchored, it will be difficult for policymakers to stimulate the economy without triggering uncontrolled price growth. And Trump's “victory” with the Federal Reserve will also reduce people's trust in other key institutions.

Fortunately, firing Powell wasn't that simple. Although the chairman of the Federal Reserve is appointed by the president, their term of office is determined by law, which means the president has no power to remove them. Trump could ask Powell to resign, but Powell has made it clear that he will not resign.

In other words, the independence of the Federal Reserve is not enshrined in the US Constitution. With sufficient support from both houses of Congress, Trump could amend the law to fire Powell. But for now, it is almost certain that any attempt to overturn the independence of the Federal Reserve will disrupt financial markets.

If removing Powell is not an option, Trump may appoint a “shadow” Open Market Committee (FOMC) to weaken Powell's authority and put pressure on the Federal Reserve. Trump has been doing something similar since his election last November. Although Biden is still the President of the United States, the world is paying far more attention to him than Biden.

What is certain, though, is that this strategy is unlikely to have a meaningful impact on the Federal Reserve. Powell may face sharp questions about the “shadow” Federal Reserve at congressional hearings or press conferences, but the agency won't have more weight than other external critics. Unless it consistently outperforms the Federal Reserve in predicting economic trends (which is highly unlikely), Trump's “shadow” Federal Reserve will be ignored.

Still, the risks posed by Trump's approach should not be underestimated. Central bank independence is arguably the most important macroeconomic policy innovation since the supply-side revolution in the 1970s. While inflation targets and the “Taylor Rules” have played a key role in shaping modern monetary policy, they depend on the central bank's credibility and autonomy. Historically, central banks led by technocrats focused on maintaining price stability have performed better than central banks plagued by political interference.

To understand the stakes, let's say Trump manages to fire Powell and pressure the Federal Reserve to keep interest rates low to boost economic growth, especially during the first two years of his administration until the Democratic Party has a chance to retake the House, then long-term interest rates — such as those on housing and car loans not directly controlled by the Federal Reserve — will almost certainly rise, first gradually and then sharply. Soon, the Federal Reserve will be forced to change its policy direction, thereby weakening its credibility and weakening the US economy.

The good news is that despite his capriciousness, Trump is ultimately a pragmatist rather than a theorist. The long-term consequences of undermining the independence of the Federal Reserve are not in anyone's interest, including his own.