Behind Trump's Battle with the Fed: Is Not Firing Powell Just a "Scapegoat Strategy"?

TradingKey - The uproar over U.S. President Donald Trump’s threat to fire Federal Reserve Chair Jerome Powell has temporarily subsided. The market broadly views this as similar to the tariff pause, with Trump’s “retreat” attributed to the pressure from the sharp declines in U.S. stocks and bonds. However, some argue that this may be Trump’s "scapegoat strategy" to shift focus.

In mid-to-late April, Trump repeatedly criticized Powell for not being aggressive enough in cutting interest rates and threatened that "Powell should leave as soon as possible." This sparked an intensified sell-off in U.S. stocks and bonds, as it raised concerns about the erosion of the Fed’s independence—a cornerstone of the dollar's credibility.

Within a week, Trump backtracked, stating that he has no intention of firing Powell but simply wants him to cut rates more aggressively, as now is the best time for rate cuts.

Many observers believe that Trump’s reversal was driven by market pressure, with lobbying efforts from U.S. Treasury Secretary Scott Bessent and others playing a role. However, some analysts suggest that keeping Powell in place may just be part of Trump’s "scapegoat strategy."

Analysts at RBC Capital Markets said that firing Powell would make it harder to scapegoat him. Shifting blame for negative economic and market impacts away from Trump’s tariff policies becomes more challenging if Powell remains in his position.

Economists widely predict that the trade war ignited by Trump could threaten U.S. economic growth and even lead to a recession.

Thus, if Powell stays as Fed Chair, Trump and his supporters might blame signs of economic slowdown on the failure to cut rates, arguing that higher borrowing costs are stifling economic activity. If Powell were fired, however, the public would likely attribute any economic downturn directly to Trump.

Fed officials have recently warned that the impact of U.S. high tariffs on inflation could be more persistent than expected, and their job is to ensure price increases remain limited.

Economists at Bank of America remarked, "They prefer to be late than wrong. They’re going to wait and see how things play out on both mandates."