Detailed explanation of the stability of the Fed chairman's position: It is not easy for Trump to replace Powell
Written by: Dong Jing
Source: Wall Street Journal
Although Trump has been criticizing Powell for not cutting interest rates and has expressed the possibility of replacing the Fed chairman, it is actually not easy to replace Powell because the legal and institutional framework provides multiple protections for the Fed chairman.
On Wednesday, a rumor that Trump might fire Fed Chairman Powell caused a sharp market shock in just one hour. According to a previous article by Jianwen , this clearly shows the financial shock that may be caused when the independence of the Federal Reserve is subject to political interference, and exposes the market's sensitivity to the risks of monetary policy independence.
On July 18, according to the trading desk, JPMorgan Chase pointed out in a research report titled "How safe is Powell's job?" that despite political pressure, multiple legal and institutional safeguards make Powell's position relatively stable.
Michael Feroli, an economist at JPMorgan Chase, analyzed in detail the legal protections for Powell's position in his report, arguing that the Supreme Court's ruling in Trump v. Wilcox provided special protection for the Fed, making it clear that "the Federal Reserve is a uniquely structured quasi-private entity," which provided a legal basis for Fed directors to be protected from "arbitrary dismissal" by the president .
In addition to the legal barriers that provide Powell with multiple protections, JPMorgan also pointed out in its research report that the Federal Reserve's governance structure also limits the president's influence on monetary policy.
Legal barriers provide Powell with multiple protections
Michael Feroli, an economist at JPMorgan Chase, noted in a report that under the Federal Reserve Act, Fed governors can only be removed for "good cause," which has historically been understood as malfeasance or dereliction of duty rather than policy differences.
In Humphrey's Executor v. United States (1935), the Supreme Court unanimously ruled that a president could not remove an FTC member who enjoyed "for cause" protection because of political differences.
JPMorgan Chase emphasized that the most critical thing is that the Supreme Court's ruling in Trump v. Wilcox in May provided the Federal Reserve with a special status.
According to the Supreme Court ruling, in the case "Trump v. Wilcox", the court approved President Trump's removal of two Democratic officials from the National Labor Relations Board (NLRB) and the Federal Civil Service Protection Board (MSPB), despite the lack of legal grounds for dismissal, and called it part of the exercise of the President's executive power. However, the majority opinion of the Supreme Court specifically wrote:
Even if Trump tries to fire Powell for "good cause," the reason currently being discussed is the cost overruns in renovating the Federal Reserve headquarters building.
But JPMorgan noted that there is a lack of historical precedent for determining the threshold for "just cause" dismissal of heads of independent agencies, and if the government chooses this path, it could lead to a lengthy legal process , which would not be good news for the market.
According to a previous article in Jianwen , if Trump really fired Powell instead of just pressuring him to resign, Powell would likely file a lawsuit to stop the action, and the case would likely eventually be submitted to the Supreme Court for trial.
One scenario that analysts speculated is that the Supreme Court could allow a lower court injunction blocking Trump's firing of Powell to remain in effect while the case is pending. " That would likely be enough to allow him to complete his term as chairman ," Wolfe Research said.
Institutional design limits the president’s influence on monetary policy
The Federal Reserve's institutional design itself limits the president's direct influence on monetary policy.
The Federal Open Market Committee (FOMC) consists of 12 people: 7 members of the Board of Governors, the President of the New York Fed, and 4 rotating regional Fed presidents. This structure disperses decision-making power, and even if some personnel are replaced, it is difficult to immediately change the policy direction.
The seven governors are nominated by the president and confirmed by the Senate for a 14-year term. The chairman and vice chairman of the Federal Reserve are nominated by the president from the governors and are confirmed by the Senate for a four-year term, which can be renewed. Powell's term as a governor is until January 2028, and his term as chairman is until May 2026.
JPMorgan Chase said that even if Powell is stripped of his chairmanship, he can still remain as a governor until January 2028, and may even be selected by the FOMC as committee chairman, thereby maintaining actual leadership in monetary policy making. This arrangement will prevent the government from appointing new governors and may maintain continuity in monetary policy.
From a personnel perspective, Trump's ability to influence the composition of the Fed through normal personnel appointments during the remainder of his term is limited. Under the current term arrangement of the board of governors, most of them will not leave during their full 14-year term, usually for personal reasons, which gives the president a certain amount of patience to wait for vacancies.
Loss of independence will push up inflation risks
The research report pointed out that economists generally believe that it is beneficial to separate monetary policy from the political cycle. The short-term perspective of the election calendar may induce politically oriented monetary policy makers to stimulate the economy at inappropriate times.
International evidence shows that central banks with greater political independence tend to promote lower and more stable inflation.
The historical record shows that political intervention led to poor monetary policy in the late 1960s and early 1970s, with adverse consequences for inflation development.
Any erosion of the Fed’s independence could add upside risks to the inflation outlook, which is already facing upward pressure from tariffs and slightly elevated inflation expectations.
In addition, market participants could demand greater compensation for inflation and inflation risk, pushing up long-term interest rates, weighing on the outlook for economic activity, and worsening fiscal conditions.
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