White House statements have sparked widespread debate regarding US President Donald Trump’s intention to remove Federal Reserve Chairman Jerome Powell. While the immediate market reaction to such a move may not be catastrophic, its potential repercussions could deepen economic turmoil. This was confirmed by Capital Economics experts in a recent note to clients.
Paul Ashworth, Chief North American Economist at Capital Economics, noted that Trump could mitigate the shock by appointing a suitably qualified replacement. Among the names being considered are Kevin Hassett, Director of the National Economic Council, and Kevin Warsh, a former member of the Federal Reserve Board.
Ashworth believes that Warsh’s return to the position may not cause an “immediate financial catastrophe,” but markets will remain nervous. He expects a decline in the value of the US dollar, coupled with a rise in long-term bond yields. This scenario would undermine monetary stability and make it more difficult for Washington to achieve its objectives. Internal Resistance Could Hinder Trump’s Monetary Policy
Even if Trump appoints a close confidant, implementing his monetary agenda will face significant internal challenges. Ashworth believes that Warsh, if appointed, will clash with the Federal Open Market Committee, which may remain opposed to rate cuts.
Put simply, Warsh’s voice will not be enough to influence the committee’s decisions, making it nearly impossible to force a rate cut. Therefore, replacing Powell alone will not guarantee the implementation of the monetary policy sought by the White House.
Indeed, US markets are experiencing heightened tension. Wall Street’s major indexes fell more than 2% on Monday, following reports that the Trump administration is actively considering removing Powell. These declines reveal the extent of concerns about political interference in the Federal Reserve’s independence.
Trump attacks Powell, paving the way for his dismissal
Trump’s comments against Powell were not spur of the moment. He has previously described him as a “big loser” and “too late.” He has also repeatedly expressed his anger at Powell’s delay in cutting interest rates, believing that this slowdown has weakened the economy.
Moreover, the Wall Street Journal revealed that Trump may seek to use Powell as a scapegoat, holding him responsible for the deteriorating economy, especially if the effects of the trade wars escalate. This trend reflects the administration’s desire to protect its image ahead of the elections.
However, according to analysts, this move will undermine investor confidence. Tampering with the Fed’s independence would mean a loss of confidence in the US monetary system. Furthermore, markets will not tolerate attempts to influence the central bank’s policy.
Wider Concerns About Undermining the Fed’s Independence
Ashworth emphasized that removing Powell would only be the beginning. If Trump is determined to impose his vision, he may be forced to remove other members of the board. Currently, the Fed’s Board of Governors has seven members, meaning that removing Powell alone will not guarantee the passage of new policies. Imagine a scenario in which the majority is replaced by people close to Trump. The Fed would then be viewed as a political tool, unleashing a wave of monetary chaos. In this case, the dollar would fall further, while long-term bond yields would rise. This, in turn, would erode international investor confidence.
Also, markets may be forced to reassess the outlook for the US economy. The loss of monetary policy independence would lead to greater volatility and make it more difficult to control inflation. Consequently, any short-term benefits from a rate cut could quickly fade in the face of these structural challenges.
Multiple Risks Await Markets
In light of all this, analysts believe that Trump’s best option is to exert political pressure without violating the bank’s independence. Impeachment, on the other hand, would ignite a deeper crisis that would quickly be reflected in all economic indicators.
If Trump actually carries out his threat, markets will face four major challenges:
- A weaker dollar: markets will anticipate an excessive interest rate cut.
- Rising bond yields: due to investors’ fears of inflation and a loss of monetary control.
- Foreign capital flight: due to the weakening confidence of global institutions in the stability of the US economy.
- Turmoil in global markets: because the dollar represents the world’s reserve currency.
All of these factors make the move to dismiss Powell an ill-advised gamble. It may achieve a domestic political response in the short term, but it will cost the US economy dearly in the long term.
In recent weeks, US President Donald Trump has intensified his attacks on Federal Reserve Chairman Jerome Powell, calling him a “big loser” and “Mr. Too Late.” These criticisms came after the central bank refused to cut interest rates, despite Trump’s repeated calls to do so. Trump Blames Powell for Economic Slowdown
Trump suggested that the US economy could slow if the Federal Reserve doesn’t cut interest rates. He claimed that “inflation is virtually nonexistent.” Last week, he called for Powell’s removal, despite appointing him during his first term. Powell is scheduled to remain Fed Chair until May 2026.
Timeraos: Trump Paves the Way for Powell to Be Blamed
Nick Timeraos of the Wall Street Journal writes that Trump is paving the way for Powell to be blamed for any economic weakness stemming from trade tariffs. He suggests that Trump could use this approach to delegitimize the central bank’s independence.
Powell Affirms Federal Reserve Independence
Powell stated that the Federal Reserve will continue to base its decisions on economic data, not political pressure. He noted that the Federal Reserve has made progress in combating inflation, but has yet to reach its 2% target.
Inflation Hinders Interest Rate Cuts
Recent data showed inflation rose 0.5% in January, pushing the annual inflation rate to 3%. This increase makes it unlikely that the Federal Reserve will cut interest rates in the near future.
Trump Faces Criticism from Within His Party
Some Republicans have expressed concern about Trump’s attacks on Powell, especially amid market volatility. They warned that such statements could undermine investor confidence and threaten the stability of the US economy.
Analysts Warn of Political Interference
Economic experts have warned that political interference in the Federal Reserve’s policies could lead to a loss of confidence in the US financial system. They noted that the Federal Reserve’s independence is essential to maintaining price stability and economic growth.
Trump Continues Pressure Despite Warnings
Despite warnings, Trump continues to pressure Powell to cut interest rates. He believes this is necessary to support the economy, especially with the election approaching. However, analysts suggest that cutting rates amid rising inflation could backfire.
