President Trump has walked back his threat to fire Federal Reserve Chairman Jerome Powell.
Some Fed watchers believe the move could ultimately serve a political purpose if the U.S. economy tanks.
“Firing Powell will make it harder to scapegoat him,” analysts at RBC Capital Markets said in a note last week.
“It will be more difficult to shift the narrative around bad economic/market outcomes away from tariff policy.”
Many economists expect the U.S. economy to slow and possibly even fall into recession as the Trump administration imposes new tariffs on many trading partners — even if the U.S. is able to reach new deals with China or other major powers in the coming months.
Trump even acknowledged the possibility of a slowdown last week when he explained why the central bank should immediately cut interest rates.
“Unless Mr. Too Late, a major loser, cuts rates now, the economy will likely slow,” the president posted on his social media site Truth Social last Monday, adding that “many are calling for a ‘preemptive’ rate cut.”
The president told reporters on Tuesday that he had “no intention of firing” the policymaker, easing speculation about Powell’s fate. Just days ago, Trump claimed on social media that “it’s not too late to fire Powell.”
But that doesn’t mean Trump’s criticism of Powell is over.
On Wednesday night, Trump said in the Oval Office, “I might call” Powell and reiterated his view that “I think he made a mistake by not lowering interest rates.”
“He kept interest rates too high,” Trump added, arguing that the Fed chairman did not act quickly enough to bring down inflation in the early 2000s. “Historically, he has always been slow to act.”
On Thursday, Trump again called on the Fed to adjust monetary policy. “I hope they lower interest rates,” he told reporters. “It’s a smart move, a little bit ahead of time, even though it’s a little late now.”
According to the Wall Street Journal, Treasury Secretary Scott Bessant and Commerce Secretary Howard Lutnick warned Trump that removing Powell would cause market chaos and legal disputes.
Lutnick also told the president that it might not achieve the result the president wants – lower interest rates – because other members of the Fed’s board of governors might take monetary policy the same way, according to the Wall Street Journal.
“If Trump is determined to lower rates, he would also have to fire the other six Fed governors, which would trigger a more severe market rally, causing the dollar to fall and rates to rise at the long end of the yield curve,” said Paul Ashworth, chief North American economist at Capital Economics.
There is another risk to taking action, RBC Capital Markets said in a report last week. The market could see a sell-off after Powell’s firing, which would also intensify the blame for Trump.
“Keeping Powell around and harassing him on social media makes it easier to confuse the public and deflect the topic of tariffs,” RBC analysts wrote.
“Not much progress”
The Fed’s move on interest rates will undoubtedly be a point of contention between the White House and the central bank in the coming months, amid concerns that tariffs will push up inflation while dragging down economic growth.
Powell predicted that the Fed will face difficult decisions as it weighs its two goals of stable prices and full employment. He said there is a good chance that the economy will deviate from the Fed’s two goals “for the rest of the year,” or at least not make much progress.
Powell said he would likely prioritize controlling inflation, noting that the Fed cannot achieve a strong job market over an extended period without price stability.
He also made clear that he is not yet sure whether the inflationary effects of tariffs will be temporary or long-lasting.
This won’t win him any kudos from the White House. Bessant has made it clear that he thinks any tariff hikes will be temporary.
“Do I think President Trump will keep making threats until Jay Powell’s term is over?” Threadneedle Ventures founder Ann Berry recently told Yahoo Finance. “Absolutely.”
This is certainly not the first time a Fed chair has faced a flurry of political pressure from a president.
In the 1960s, President Lyndon Johnson pressured William McChesney Martin to moderate the Fed’s fight against inflation, as Johnson’s Great Society programs and the intensification of the Vietnam War added demand pressures to the economy.
In the 1970s, President Nixon had a lot of complaints about Fed Chairman Arthur Burns. When Burns was sworn in, Nixon even joked that the applause he received was “an early vote of appreciation for lowering interest rates and increasing the money supply.”
He further said that he respected Burns’ independence, but added, “I hope that he will independently conclude that my views are the ones to be followed.”
Nixon had pressured Burns to loosen monetary policy in the run-up to the 1972 election to improve his chances of winning. While wage and price controls initially helped to curb inflation, when controls were lifted in late 1973, inflation soared to over 13%.
“It took the Fed a decade or more to get a handle on inflation and get it down to moderate levels,” Jeffrey Lacker, former president of the Richmond Federal Reserve Bank, told Yahoo Finance.
Even Paul Volcker, the Fed chairman from 1979 to 1987 who is remembered as the leader who finally curbed inflation, faced the same pressure.
In 1984, Ronald Reagan and his chief of staff, James Baker, summoned Volcker to the White House and, according to Volcker’s memoir, ordered him not to raise interest rates before that year’s election.
“I was shocked,” Volcker wrote, but he added that he was able to avoid escalation because “I had no plans at the time for tighter monetary policy.”
Volcker said he did not respond and left the meeting without saying a word.
Fed Chairman Jerome Powell was asked in December if he had ever been pressured by the White House not to raise rates, as Volcker had been in the 1980s.
Powell said “nothing like that happened,” but he acknowledged that he had clashed with Trump during his first term, and that those clashes occurred publicly and had not changed in private.
“The president said the same thing to me privately as he did publicly,” Powell said.
