Detailed Explanation of the Stability of the Fed Chair Position: It Is Not Easy for Trump to Replace Powell

Written by: Dong Jing

Source: Wall Street Watch

Despite Trump's constant criticism of Powell for not lowering interest rates and his remarks about possibly replacing the Federal Reserve Chair, it is actually not easy to remove Powell, as the legal and institutional framework provides multiple protections for the Federal Reserve Chair.

This Wednesday, a rumor about Trump possibly firing Federal Reserve Chairman Powell caused a sharp market turmoil within just one hour. According to previous articles, this clearly demonstrates the potential financial shocks that may arise when the independence of the Federal Reserve is subjected to political interference, exposing the market's sensitivity to the risks of monetary policy independence.

On July 18, according to news from the Chasing Wind trading platform, JPMorgan recently 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.

JPMorgan economist Michael Feroli detailed in a report the legal protections surrounding Powell's position, arguing that the Supreme Court's ruling in Trump v. Wilcox provides special protection for the Federal Reserve, clearly stating that "the Federal Reserve is a uniquely structured quasi-private entity," which provides the legal basis for Federal Reserve governors to be shielded from "arbitrary dismissal" by the president.

In addition to the legal barriers providing multiple protections for Powell, JPMorgan also pointed out in its research report that the governance structure of the Federal Reserve limits the president's influence over monetary policy.

The legal barrier provides multiple protections for Powell.

JPMorgan economist Michael Feroli pointed out in a report that according to the Federal Reserve Act, Federal Reserve Board members can only be removed for "just cause," which has historically been understood as misconduct or malfeasance, rather than policy disagreements.

In the 1935 case Humphrey's Executor v. United States, the Supreme Court unanimously ruled that the president cannot remove members of the Federal Trade Commission who are entitled to "for cause" protection due to political disagreements.

The "Humphrey's Executor" case was an important precedent set by the U.S. Supreme Court in 1935. This case established the principle that the president cannot arbitrarily dismiss the heads of independent regulatory agencies due to policy disagreements. This precedent has long protected independent agencies such as the Federal Reserve from direct political interference by the president.

JPMorgan Chase emphasized that the key point 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 Merit Systems Protection Board (MSPB), despite the lack of legal grounds for dismissal, stating it was part of the exercise of presidential executive power. However, the majority opinion of the Supreme Court specifically stated:

"The Federal Reserve is a uniquely structured quasi-private entity that continues the unique historical traditions of the First and Second Banks of the United States." This grants the Federal Reserve a special status, protecting the Board from "arbitrary dismissal".

Even if Trump tries to dismiss Powell for "just cause", the reason currently being discussed is the cost overruns on the renovation of the Federal Reserve headquarters.

However, JPMorgan pointed out that there is a historical lack of precedent for clearly defining the "just cause" termination boundaries for independent agency heads, and if the government chooses this path, it could lead to prolonged legal proceedings, which is not good news for the market.

According to previous articles, if Trump really fires Powell instead of just pressuring him to resign, Powell is likely to file a lawsuit to stop this action, and the case will likely end up being submitted to the Supreme Court for review.

One scenario speculated by analysts is that the Supreme Court may allow lower courts to keep the injunction preventing Trump from firing Powell in effect during the case proceedings. Wolfe Research stated: "This is likely enough for him to complete his term as chairman."

The institutional design limits the president's influence on monetary policy.

The design of the Federal Reserve's system itself limits the president's direct influence on monetary policy.

The Federal Open Market Committee ( FOMC ) consists of 12 members: 7 Board members, the President of the New York Fed, and 4 rotating regional Fed presidents. This structure disperses decision-making power, making it difficult to immediately change policy direction even if some personnel are replaced.

7 members of the Board are nominated by the President and confirmed by the Senate, serving a term of 14 years. The Chair and Vice Chair of the Federal Reserve are nominated by the President from among the members of the Board, confirmed by the Senate, and serve a term of 4 years, which can be renewed. Powell's term as a member of the Board ends in January 2028, and his term as Chair ends in May 2026.

JPMorgan stated that even if Powell is stripped of his chairmanship, he can still remain as a governor until January 2028, and may even be elected as the committee chair by the FOMC, thereby maintaining actual leadership in monetary policy formulation. This arrangement would prevent the government from appointing new governors and could maintain the continuity of monetary policy.

From a personnel perspective, Trump's ability to influence the composition of the Federal Reserve through normal personnel appointments during the remainder of his term is limited. According to the current arrangement of director terms, most directors 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.

Impaired independence will increase inflation risk

The research report points out that economists generally believe that separating monetary policy from the political cycle is beneficial. The short-term perspective of the election schedule may tempt politically driven monetary policy makers to stimulate the economy at inappropriate times.

International evidence suggests that central banks with greater political independence often promote lower and more stable inflation.

Historical records show that political interference led to poor monetary policy in the late 1960s and early 1970s, having adverse effects on the development of inflation.

Any weakening of the Federal Reserve's independence could increase the upside risks to the inflation outlook, which is already facing upward pressure from tariffs and slightly elevated inflation expectations.

In addition, market participants may demand greater compensation for inflation and inflation risk, which could drive up long-term interest rates, dampen the outlook for economic activity, and worsen fiscal conditions.