Trump's Attack on Firing Powell Not Over Yet? Will the Fed's Independence Fall Off Its Pedestal?

After a series of financial crises and bank failures in the late 19th and early 20th centuries, New York bankers called for a stronger central institution to manage the U.S. monetary and credit system. In response, Congress passed the Federal Reserve Act in 1913, establishing the Federal Reserve System, which remains the central bank of the United States today.

The Fed’s primary responsibilities include formulating monetary policy, regulating financial institutions and overseeing the national payment system, etc. Its most well-known role is macroeconomic management through adjustments to the federal funds rate—raising rates to reduce the money supply or lowering them to stimulate it.

Since the late 1970s, the Fed’s "dual mandate" of "maximum employment" and "price stability" has taken shape:

• During periods of high unemployment, economic recession, or low inflation, the Fed may stimulate employment and growth by cutting rates or implementing quantitative easing (QE), as seen during the 2008 financial crisis.
• During periods of low unemployment, economic overheating, or high inflation, the Fed may raise rates or implement quantitative tightening (QT) to prevent further inflation, as seen after the pandemic during the Biden administration.

The independence of the Federal Reserve is a core principle of its structure, establishing it as a "semi-public, semi-private" institution that operates independently of the executive branch.

This independence did not emerge overnight but developed over time in response to financial turmoil, economic crises, wartime debt issuance, and periods of high inflation:

• 1913 Foundation: To address financial disorder and promote economic stability, the Federal Reserve Act established initial independence through staggered appointments and a decentralised structure.
• 1930s Policy Autonomy: The Great Depression highlighted the dangers of political interference. Revisions to the Banking Act of 1933 and the Federal Reserve Act of 1935 granted the Fed greater autonomy, such as control over reserve requirements.
• 1951 Treasury Independence: After WWII, the Fed was forced to keep rates low to support government debt. The 1951 Treasury-Fed Accord ended this artificial control, allowing the Fed to adjust monetary policy based on economic conditions rather than fiscal needs.
• 1970s Dual Mandate: Political pressure from President Nixon to cut rates during the Vietnam War era led to runaway inflation. The Federal Reserve Reform Act of 1977 formalized the dual mandate of inflation and employment.
• 1979 Anti-Inflation Success: Paul Volcker’s successful fight against double-digit inflation validated the importance of Fed independence, earning public trust.
• 1990s Transparency Reforms: The Fed began publishing policy decisions, economic forecasts, and meeting minutes, enhancing accountability and communication with the public.

Overall, the Fed’s independence stems from legal protections, fiscal autonomy, a decentralized structure, and policy autonomy.

• Legal Protections: The Federal Reserve Act mandates that Fed governors are nominated by the president and confirmed by the Senate for 14-year terms, spanning multiple administrations.
• Fiscal Independence: The Fed does not rely on congressional appropriations; its revenue comes from monetary operations like bond trading and interest income.
• Decentralized Structure: The Federal Reserve Board consists of seven members, with 12 regional Federal Reserve Banks overseen by locally elected boards, not government appointees.
• Policy Autonomy: While Congress sets the dual mandate, the Fed independently implements monetary policy without direct interference from either Congress or the White House. Decisions are made by the Federal Open Market Committee (FOMC), which consists of seven governors and five regional bank presidents.

Maintaining the Fed’s independence ensures that monetary policy remains free from political interference and helps preserve public confidence. If the Fed were subject to presidential pressure, short-term political objectives could jeopardise long-term economic stability.

Compared to central banks such as Japan’s or those in emerging economies, the Fed enjoys greater independence—an essential factor supporting the credibility of the U.S. dollar.

As Georgetown University professor James Angel noted, the dollar and U.S. Treasuries are America’s financial services exports. Bloomberg reported that Trump’s attacks on the Fed are turning the so-called "Trump trade" into  "Sell America."

The Fed Chair and governors play a central role in the organization’s structure, and their appointment process reflects the principle of independence. The Federal Reserve Board comprises seven members who oversee policy formulation and banking supervision.

• Presidents nominate candidates, who must pass Senate Banking Committee hearings, committee votes, and full Senate confirmation by a simple majority.
• Governors serve 14-year terms, non-renewable, with successors completing any unexpired terms.
• The Chair is selected from the seven governors and confirmed by the Senate for a four-year term, renewable. Their term is not synchronized with the president’s.

Jerome Powell, the current  Chair of the Fed, was appointed as a governor by President Obama in 2012 and as Chair by Trump in 2017. He was re-nominated by President Biden in 2021. His term as Chair expires in May 2026, and his term as governor extends until January 2028.

No U.S. president has ever fired a Fed Chair. Legal precedent suggests that Trump cannot remove Powell unless there is "cause," such as misconduct or malfeasance; political disagreements alone are insufficient.

• The Federal Reserve Act allows removal of governors only "for cause."
• The 1935 Humphrey’s Executor case established that presidents cannot arbitrarily fire heads of independent agencies, reinforcing the necessity of Fed independence.

For Trump to remove Powell, the Supreme Court would need to overturn established precedents, thereby expanding presidential authority. However, legal experts are sceptical that the current court would take such a step, given the critical importance of Fed independence and the absence of compelling legal rationale to overturn prior rulings.

Similarly, Trump is attempting to remove two board members from independent agencies, a move that has drawn significant public attention. Observers are watching closely, as this could signal the Supreme Court’s tacit approval of broader presidential power over the appointment and removal of officials— potentially extending to the Federal Reserve Chair.

On April 10, the U.S. Supreme Court temporarily allowed Trump to remove Gwynne Wilcox from the National Labor Relations Board and Cathy Harris from the Merit Systems Protection Board. Powell has stated that this decision does not apply to the Federal Reserve.

Powell currently holds dual roles as both Chair and Governor of the Federal Reserve. While removing him as Chair might be legally feasible—allowing him to continue serving as a governor —outright dismissal from both positions would severely undermine the Fed’s independence, likely triggering market turmoil and a constitutional crisis.

If Powell were removed as Chair, Trump would need to appoint a replacement from among the six remaining governors, including Christopher Waller and Michelle Bowman, both of whom he previously nominated.

Some analysts suggest that Powell could challenge such a move by filing a lawsuit in federal court, leveraging his legal expertise and considerable resources.

Within days of threatening to fire Powell, Trump reversed course, stating he had no intention of doing so but emphasised his desire for faster rate cuts, calling it an opportune time.

Analysts attribute this shift to heightened market volatility, concerns over economic growth, lobbying from business leaders, and warnings from Treasury Secretary Scott Bessent and Commerce Secretary Lutnick about potential legal battles.

Others argue that Trump’s move reflects a "scapegoat strategy "—By keeping Powell in place, he retains someone to blame for any economic slowdown or recession, accusing him of failing to cut rates.

Meanwhile, many economists warn that Trump’s tariff policies pose significant risks to global growth. On April 23, the IMF downgraded its 2025 U.S. growth forecast from 2.7% to 1.8%, citing tariffs and heightened uncertainty.

Markets have already reacted: stocks, bonds, and the dollar have all suffered. Even before any action, expectations of weakened Fed independence have caused global investors to lose confidence in the dollar and U.S. policies, leading to a sell-off of Treasuries, equities, and the currency.

According to CICC, if the simultaneous decline in stocks, bonds, and the dollar persists in April 2025, it would mark the seventh monthly "triple rout" since 1971.