The re-election of Donald Trump has reignited a heated debate among investors: Does the president have the power to remove Federal Reserve Chair Jerome Powell? Trump has been critical of Powell’s interest rate decisions since appointing him in 2018, leading many to speculate that a new Trump administration could clash with the central bank once again. However, Powell’s recent press conference delivered a strong message. He firmly stated that a U.S. president is “not permitted under the law” to remove the Fed’s chair, adding that he would refuse to step down if Trump requested it.
While the Federal Reserve Act technically shields the Fed chair from presidential removal, there are some caveats. According to Section 10, a Fed chair can only be dismissed for legal or ethical violations, not for policy disagreements. This structure aims to protect monetary policy from short-term political influence. However, Trump could choose not to reappoint Powell when his term ends in 2026, potentially replacing him with someone who aligns more closely with his desire for lower interest rates.
Bill Adams, chief economist at Comerica Bank, believes Trump will likely pressure the Fed to cut interest rates more aggressively, similar to his approach in his first term. However, he emphasizes that this pressure is unlikely to significantly affect the Fed’s rate decisions over the next year, given the central bank’s structure, which is designed to safeguard its independence.
Powell’s press conference served as an opportunity to reaffirm the Fed’s autonomy from the executive branch. BNP Paribas economist Anis Bensaidani noted that Powell’s refusal to resign if requested by Trump underscored the Fed’s independence. Powell further reinforced this message by referencing legal safeguards against unwarranted dismissal.
However, Powell also acknowledged the potential for new administration policies, stating that the Fed would “only model any policy changes after they have been passed” and make decisions later. This cautious approach appears aimed at avoiding the perception that the Fed is aligning with any specific political agenda.
Powell’s recent remarks have struck a dovish tone, sparking debate among economists about the Fed’s future rate trajectory. Bank of America economist Aditya Bhave suggests that a December rate cut remains Powell’s base case. This dovish outlook has led some analysts to predict further rate reductions in the coming months, despite the economy and labor market showing resilience. Goldman Sachs economist David Mericle anticipates “consecutive cuts in December, January, and March,” with additional reductions in June and September to reach a terminal federal funds rate of 3.25% to 3.5%. Mericle emphasizes that Powell has stated twice that the labor market is cooling, and the Federal Open Market Committee (FOMC) wants to prevent further cooling.
However, some economists question the need for more easing, arguing that recent rate cuts have been excessive. Veteran Wall Street analyst Ed Yardeni believes that the 75-basis-point rate cuts since September 18th “is too much, too soon,” given the strength of the economy and labor market. Yardeni points out that Powell himself acknowledged the economy’s strength, stating that “both remain solid.”
Despite this, Powell maintains that the Fed’s policy is still restrictive, as interest rates remain above the “neutral” level. Yardeni questions the need for another rate cut, given the economy’s current state. He also highlights that the recent surge in Treasury yields, up 75 basis points since the last rate cut, reflects robust economic growth and lower recession risks.
Powell minimizes the impact of higher inflation expectations, but Yardeni points out that market inflation expectations, based on the difference between nominal Treasury yields and TIPS yields, have risen. The 5-year breakeven inflation rate, a key market indicator, has climbed from 1.98% on September 8th to 2.4% on November 8th. This increase suggests that investors are increasingly skeptical about the Federal Reserve’s ability to keep inflation at its 2% target over the next five years.
The future of the Fed’s rate policy, Powell’s position, and the relationship between the Fed and the White House remain uncertain. While Powell has asserted the Fed’s independence, Trump’s re-election has undoubtedly introduced new complexities and challenges to the delicate balance of monetary policy and political influence.
