Firing Powell Would Be a Mistake — But Not a Disaster

Punchline: Speculation is rife that Donald Trump will fire Fed Chair Jerome Powell to force interest rate cuts. That would be a serious political mistake. But it would not mean the end of the Fed as we know it. Institutional checks, market discipline and the reputations of likely successors make it hard to imagine a full-blown policy takeover.

Commentators have been speculating for some time that President Trump might try to fire Federal Reserve Chair Jerome Powell and install someone who would slash interest rates on command.

That would be a serious and regrettable move — a blow to the Fed’s perceived independence and a signal that the White House sees monetary policy as fair game. But while the politics would be dramatic, the practical consequences for policy may be less extreme than many assume. The Fed is harder to push around than the headlines suggest.

Who Sets Fed Policy, and How?

First, let us separate the legal from the political. Whether a president can remove the Fed chair at will is a live legal question. Powell’s term as governor runs until January 2028, and his term as chair until May 2026. The Federal Reserve Act says a governor can only be removed “for cause,” but what counts as cause is unclear.

Let us assume, for argument’s sake, that the Supreme Court rules Trump has the power to remove him. Even then, what would his goal be?

He plainly wants lower interest rates to stimulate the economy and reduce the cost of servicing the public debt. But part of the appeal may also lie in undermining the symbolism of the Fed as an independent institution, free to contradict the White House in public.

For Trump, firing Powell would send a political signal: the Fed is not as untouchable as it likes to think. But would the next chair rush to push rates lower? That is far less clear.

Look at the names most often floated as Powell’s replacements: Scott Bessent, Kevin Warsh, and Kevin Hassett. None are obvious monetary doves.

Bessent is a Yale graduate, hedge fund founder, and former chief investment officer for George Soros. Warsh, a former Morgan Stanley banker and Bush-era Fed governor, has often sounded hawkish on inflation. Hassett is a respected economist with a PhD from the University of Pennsylvania, formerly at the Fed and Columbia, and later chair of Trump’s Council of Economic Advisers.

These are not fringe activists. Absent Trump, they look like the sort of establishment conservatives any Republican president might nominate.

Reasonable economists can disagree about the exact level of interest rates — should they be 25 or 50 basis points higher or lower? That is normal.

But wanting to lower rates by one or two cuts is a long way from arguing that the US should slash rates by several percentage points to please a president. None of these candidates look likely to do so.

More importantly, the Fed chair does not set policy alone. The federal funds rate is decided by the Federal Open Market Committee (FOMC), which includes the seven Fed governors and five of the twelve regional bank presidents.

Any new chair would need to persuade a majority of this committee. It is hard to imagine the FOMC supporting blatant political interference or endorsing large, unjustified cuts. Quite apart from personal reputations, the institutional culture of the Fed places a high premium on continuity and credibility.

Markets as a Check on Power

There is, however, one caveat. To the best of my knowledge, the precise internal procedures of the FOMC are not set in law.

A chair determined to override the committee could, in theory, try to change how decisions are made — for example, by announcing that policy would be set by the chair “after consultation” with the committee, rather than by majority vote. But this would be the nuclear option.

Markets would not see this as bold reform; they would see it as a hostile takeover. Global investors could take fright and sell US assets, fearing political interference in monetary policy. That wave of selling would push up bond yields, weaken the dollar, and drive down stock prices.

The result would be large capital losses for both domestic and foreign holders — including American pension funds and retirement accounts. Such financial turmoil would be politically costly and deeply unpopular.

A sharp adverse market reaction would tighten financial conditions and damage Trump’s standing, likely prompting the White House to backtrack.

In this sense, market sentiment creates an important brake on how far any president can push Fed policy.

Conclusion

In short, while Trump removing Powell would be politically unwise and damaging to perceptions of the Fed’s independence, the practical consequences for monetary policy may be more limited.

There are three main reasons why. First, the people floated as replacements are not political firebrands or fringe activists. Second, the chair alone does not control monetary policy; the FOMC as an institution is set up to resist arbitrary swings. And third, financial markets would act as a powerful constraint.

Any perceived takeover of the Fed would likely provoke a sharp selloff — higher yields, weaker dollar, falling equities — creating political and economic pressure for the administration to retreat. But even before markets react, institutional dynamics matter: a replacement chair would still need to persuade the committee, and candidates under discussion are unlikely to push extreme moves.

In the end, replacing the chair would be politically fraught and legally contested — and reshaping the Fed much harder still.

The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.