Trump's "Powell Dilemma": When the President's Anger Meets the Federal Reserve's Ironclad Rules

Original title: Top Trump aides urged president to tone down attacks on Jerome Powell

Original authors: Jeff Stein & Andrew Ackerman & Dan Diamond

Source of the original text:

Compiled by: Daisy, Mars Finance

According to three people familiar with the matter, President Donald Trump's sudden change in rhetoric towards Federal Reserve Chairman Jerome H. Powell on Tuesday reflects private lobbying by his senior advisers—who have urged the president to stop his fierce criticism of the central bank.

On Monday, when Trump criticized Powell as the "number one loser," the stock market plummeted, sparking speculation that the president might dismiss the Federal Reserve chairman. However, by Tuesday afternoon, Trump seemed to have toned down his rhetoric, stating that he had "no intention of firing" Powell and accusing the "media of always exaggerating."

Stock index futures jumped in overnight trading, and the market continued to soar after the opening on Wednesday.

Anonymously revealed by insiders involved in internal discussions, the president's change of attitude took into account the advice of several government officials, including Treasury Secretary Scott Bessen and Commerce Secretary Howard Lutnik. The officials advised the president that the government does not need to trigger further turmoil in the financial markets by going to war with the Federal Reserve, especially as it already faces significant economic battles such as trade disputes and new tariffs. One of the insiders stated that the decline in the stock market has made Trump more inclined than a month ago to allow Powell to remain.

Trump said on Tuesday: "I would like to see him be more aggressive on the idea of interest rate cuts. Now is the perfect time for a rate cut. If he doesn't do it, is it the end of the world? No, but it is a good time. Indeed. ... He could have acted sooner. But I have no intention of firing him." Spokespeople for the Treasury and Commerce Departments declined to comment.

White House spokesperson Taylor Rogers stated: "We will not discuss private conversations that may or may not have occurred with the president. The president has an excellent advisory team that provides recommendations on various issues, but the final decision-making authority rests with the president."

During this statement, the president also softened his rhetoric on the China-U.S. trade war. The Wall Street Journal reported on Tuesday that the government is considering reducing tariffs on China by 50% to 65%. Trump stated: "We are getting along pretty well with China. I think we are getting along well with almost all countries. Everyone wants to work with the United States." He added that China "ultimately has to reach an agreement."

During his first term, Trump considered replacing Powell multiple times, but each time he was discouraged by his aides - they warned that such a move would disrupt the markets and that the president lacked legal authority. Trump initially nominated Powell, and the current president Biden reappointed him for another term, which will expire next year.

In recent weeks and even months, Trump has reintroduced the idea of replacing the Federal Reserve chairman with a new aggressive attitude, raising concerns among long-time observers that he may ultimately take action. The factors that once constrained him—legal concerns, institutional norms, and strong opposition from senior officials—have largely disappeared.

According to federal law, the Chairman of the Federal Reserve can only be removed for "cause"—a term broadly interpreted as serious misconduct or dereliction of duty, rather than policy disagreements. However, Trump and some of his allies have signaled a willingness to challenge this precedent, arguing that the legal provision leaves room for the White House to reinterpret the law.

"The entire environment has undergone a tremendous change," said Peter Conti-Brown, a historian of the Federal Reserve at the University of Pennsylvania.

That concern escalated dramatically a week ago when Powell delivered a speech at the Economic Club of Chicago, expressing concerns about Trump's economic policies, particularly tariffs, in the strongest language yet to date. The next day, Trump posted on social media Truth Social that he "can't wait to fire Powell immediately", and on Monday he denounced him as the "number one loser". The president warned that the U.S. economy could slow without an immediate interest rate cut amid the widespread shock of the trade war. The comments triggered a collective dive in the three major stock indexes, but the market recovered most of its losses on Tuesday.

"Trump ultimately made a wise move," said Stephen Moore, a former external economic advisor to Trump. "It's obvious that the market would react violently negatively to firing Powell, and considering the market turbulence over the past month or so, now is not a good time to increase uncertainty."

The Federal Reserve refused to comment on Trump's repeated attacks. Powell insisted that the president has no authority to dismiss him and that he plans to complete his term as chairman until May 2026. The structure of the Federal Reserve is designed to shield it from political pressures from the White House or Congress affecting interest rate decisions. This institutional arrangement aims to keep monetary policy away from short-term political goals—because elected officials often tend to lower interest rates to stimulate immediate growth, even if this could trigger long-term inflation and ultimately harm the overall economy.

Although many analysts believe that the likelihood of Trump actually seeking to fire Powell is low, this risk has been enough to trigger a rare combination of simultaneous declines in U.S. bonds, stocks, and the dollar on Monday.

Krishna Guha of Evercore ISI pointed out that the market's reaction clearly conveys the signal that "damaging the independence of the Federal Reserve will be negative for all major asset classes in the U.S." He stated that this also serves as a partial rehearsal for the consequences that "if Trump really tries to fire Powell" could entail.

The Federal Reserve typically raises interest rates to increase borrowing costs to curb inflation, and lowers rates when there are concerns about an economic slowdown. Last week, Powell warned that Trump's tariff policy "is very likely" to cause a temporary spike in inflation — and that the duration may be longer than expected.

Powell stated that if there is a situation where economic slowdown coexists with rising inflation, the current interest rate cuts will face a dilemma. However, he still expresses confidence in the independence of the Federal Reserve, emphasizing that it has strong support in Washington—especially from the most influential Congress.