Probably no other American president has expressed so much public displeasure with his own choice to head the U.S. Federal Reserve as has Donald Trump with Jerome Powell. It actually reached the point that much speculation has arisen as to whether or not he can fire the Fed chair if he wishes. The quick answer seems to be no, but there may be some highly political and difficult means for him to do so. In any event, no one really knows for sure, because the issue has never been fully tested in a court of law.
What doesn't appear to be in question is what the market and economic repercussions would be if the president did in fact try to oust the Fed chair for policy reasons and was somehow successful in doing so. The loss of independence by the Fed may cause extreme loss of confidence in the markets by investors and the resulting consequences to the overall economy, both in the U.S. and abroad.
The Fed itself is fairly clear on the matter of whether the president can actually fire the Fed chief. According to Section 10, Paragraph 2 of the Federal Reserve Act, members of the Fed's Board of Governors—including the chair—are nominated by the president to 14-year terms and cannot be removed before then except "for cause."
What Does "For Cause" Mean?
The phrase "for cause" basically means that members of the Fed board—as well as the heads of some other government agencies—can't be removed merely at the president's whim or pleasure but only for some kind of dereliction of duty. This has been upheld by a Supreme Court ruling.
In 1933, President Franklin Roosevelt removed William Humphrey, who was appointed by his predecessor Herbert Hoover, as a member of the Federal Trade Commission. Humphrey then sued the government in order to regain his position and back pay. Humphrey died in 1934 before the Supreme Court ruled unanimously in his favor, citing the FTC statute that says a commissioner may not be fired except for "inefficiency, neglect of duty, or malfeasance in office."
While that case may provide a precedent in the event that the president tried to fire the Fed chief simply because of a policy disagreement, the fact is that the FTC is not the Fed, so it can be argued that the 1934 decision doesn't apply.
"The short answer is that we don't know — no president has ever attempted to fire a Fed chairman before," according to American Banker. "The president would have to fire Powell, provide some manner of justification for his termination, and that termination would have to be contested by Powell in court."
It would likely be difficult for the Trump administration to prove that Powell had met the standards for being fired "for cause." A mere disagreement over monetary policy probably wouldn't pass muster with a judge. "That's because the federal funds rate is set by the Federal Open Market Committee over which the chairman presides, but on whose decisions he only has one vote," according to the American Banker. "The president can't hold the Fed chairman responsible for decisions reached by the FOMC as a body."
Does That End The Matter?
Once the president nominates the chair and he or she is then confirmed by the Senate, "the president is out of it and the only way you can remove a chair from office is literally if they broke the law," Ellen Zentner, Morgan Stanley's chief U.S. economist, told CNBC.
Two of the Trump administration's top officials have also come to that conclusion, as the president himself reportedly has. White House Budget Director Mick Mulvaney and Treasury Secretary Steven Mnuchin both made public comments to that effect in late December.
"I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so," Trump told Mnuchin, according to a December 2018 tweet by the Treasury Secretary.
Even if the president did take the step to fire Powell, it wouldn't necessarily change Fed policy to one Trump desires. Peter Conti-Brown, a professor at the University of Pennsylvania's Wharton School and author of the 2016 book "The Power and Independence of the Federal Reserve," says that Trump may be able to remove Powell as Fed chair. However, he goes on to say that Trump can't easily kick him off the Fed, where he would remain as a member of the board of governors until his term expires or he elects to leave on his own.
While Trump may then be able to nominate a new Fed chair, that person would still have to be confirmed by the Senate. Moreover, the FOMC, which sets Fed monetary policy, elects its own chair, and they may very well stick with Powell or nominate someone who may also run afoul of the president.
Having two separate chairs on the Fed—one to head the Fed, one to head the FOMC—could create "market chaos," Conti-Brown said. He added that it "would represent a governance crisis that would damage the Fed, damage the presidency, and damage the nation."
How Would Markets React?
Whether or not the president can fire the Fed chair simply because he disagrees with their policies seems more or less settled absent an actual court case to decide the matter. There also doesn't seem to be any disagreement among market participants about what the market reaction would be if he tried—and somehow succeeded.
According to American Banker, it "would be economic suicide. Just the gesture of firing a trusted and well-respected Fed chairman because he is insufficiently loyal to the president would send markets into a tailspin from which the nation would not easily recover."
While the president "would likely find himself in murky legal waters" if he tried to fire Powell, "the bigger concern is that any move on that front would ignite a chain of calamities that could derail the global economy and financial markets," The Hill wrote. It "could also trigger a staggering stock market meltdown, spark intense congressional backlash and damage the country's role as the world's largest economy."
That's because "the Fed is considered critical to the stability of the U.S. economy, and its policies have profound influence over foreign counterparts. Analysts say if Trump stages a threat to the Fed's independence, it could throw the global financial system into chaos."
"If investors don't believe the Fed is independent, they're going to bail," according to Mark Zandi, chief economist at Moody's Analytics. "An independent central bank is key to a well-functioning financial system and economy."
Fed Independence Is Crucial
"The independence of the Fed is one of the pillars of confidence global investors have in the U.S. financial system," a columnist at American Thinker wrote. "Powell's removal would undermine that confidence because it would now seem the most important central bank was now under the control of a politician, who may not always have the best interests of the economy at heart."
In addition to monetary policy becoming "unpredictable and politicized, … the harm would be even greater should a genuine crisis erupt, such as a financial institution getting into trouble or a country threatening to default on its debts," according to the Wall Street Journal. In past such events, the Fed has worked with the Treasury and White House to coordinate a response, but that might be jeopardised in the future "for fear of the fact, or perception, of political pressure."
As President Donald J. Trump has repeatedly criticized Federal Reserve Chair Jerome Powell over the Fed's monetary tightening policies, speculation has arisen as to whether a president can actually fire the Fed chief or any members of the Fed's board of governors.
According to the Fed, board members can only be removed "for cause," which is generally taken to mean some serious dereliction of duty. Short of proving that, it would be extremely difficult for a president to remove a Fed board member. However, an actual attempt to do so would likely trigger a constitutional crisis alongside market and economic mayhem both in the U.S. and abroad, as investors have come to rely on the Fed's independence to set monetary policy.
FXCM Research Team
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