In a notable shift, U.S. President Donald Trump has stepped back from his previous threats to dismiss Federal Reserve Chair Jerome Powell, following a series of pointed criticisms aimed at the central bank leader for his reluctance to cut interest rates.
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During a press briefing in the Oval Office yesterday, Mr. Trump reassured reporters, saying, “I have no intention of firing him.” He further expressed his desire for a more proactive approach from Powell, stating, “I would like to see him be a little more active in terms of his idea to lower interest rates.”
This de-escalation was met with enthusiasm on Wall Street, as equity index futures soared nearly 2% when trading resumed last night. Commenting on the situation, Evercore ISI Vice Chairman Krishna Guha noted, “Whether this reflects Monday’s brutal foretaste of what would happen in markets if he did try to fire Powell, or was the plan all along, it is a clear positive.” Guha further added, “It materially reduces the likelihood of worst-case outcomes, including stagflation and the morphing of the tariff crisis into a sovereign debt crisis, though these risks remain.”
During the same Q&A session with reporters, Mr. Trump voiced optimism about a potential trade agreement with China that could lead to a significant reduction in tariffs, a sentiment that appeared to resonate well with investors. He remarked that a deal would result in “substantially lower tariffs on Chinese goods,” implying that the final agreement would not resemble the current elevated rates, although he specified, “it won’t be zero.”
The backdrop to Mr. Trump’s recent remarks includes a tumultuous relationship with the Federal Reserve. His consistent barbs and threats, including a social media post declaring that Powell’s termination “cannot come fast enough” and referring to him as “a major loser,” had contributed to market anxieties. Investors recognize the Fed’s independence as a linchpin for maintaining its credibility as the world’s preeminent central bank and a foundation of global financial stability.
While it seems that Mr. Trump has momentarily shelved his threats, his critiques regarding the Fed’s policy direction remain sharp. He emphasized, “We think that it’s a perfect time to lower the rate, and we’d like to see our chairman be early or on time, as opposed to late.”
It’s worth noting that Mr. Trump’s dissatisfaction with Powell traces back to his first term in office, where he appointed Powell to head the Federal Reserve but later grew frustrated with his ongoing rate hikes. Although the President has at times hinted at the possibility of firing Powell, he has been cautioned against such actions by his advisers.
The legality of a potential dismissal is complex; while Powell is a political appointee, the Federal Reserve Act of 1913 limits the removal of Fed governors to situations of “cause,” traditionally interpreted as misconduct rather than policy disagreements. Still, commentators point out that there is ambiguity around the rules governing the Fed chair’s removal.
As Mr. Trump’s harsh critiques were pronounced amidst ongoing court cases surrounding firings of other independent agency officials, Fed observers closely monitor these developments. They raise questions about the extent of presidential authority over Federal Reserve officials, who have been expected to operate free from political interference.
Since reducing interest rates by a full percentage point late last year, currently set between 4.25% and 4.5%, the Fed has maintained this range through recent policy meetings. Their next rate-setting session is scheduled for two weeks from now.
Concerns loom over how Mr. Trump’s aggressive tariffs, implemented since early February, might reignite inflation, complicating the Fed’s objectives of hitting the 2% target. At the same time, policymakers are wary that these tariffs could hinder economic growth and elevate unemployment rates while simultaneously exerting upward pressure on inflation.
As a result, the Fed has adopted a cautious approach to future rate cuts, with some members still anticipating potential reductions later this year. Following Mr. Trump’s remarks, interest rate futures traders have adjusted their expectations, now predicting three quarter-point cuts by the end of the year, down from earlier estimates of four.
Currently, while “hard data” indicators such as employment and retail sales appear robust, surveys of consumer and business sentiment reveal a rapid decline in confidence. The prevailing consensus among economists is leaning toward a downside risk trajectory as the repercussions of tariffs accumulate.
In light of these developments, the International Monetary Fund (IMF) recently downgraded its growth forecasts for both the U.S. and global economies, with Mr. Trump’s tariff policies primarily at the heart of these adjustments.
