Even Donald Trump Former President Donald Trump has increased his public attacks on Jerome Powell. This fiery faceoff, and its profound implications for the U.S. economy, pits Powell, the Federal Reserve Chair Trump appointed to his first term, against his white-hot boss. Last week, Powell faced lawmakers in a congressional hearing, where he firmly addressed Trump’s unrelenting attacks, marking a significant escalation in their contentious relationship. As Powell’s term approaches its end, Trump is keenly interested in appointing Hughes’ successor. He’d like a Secretary of the Treasury that hews to his economic vision a bit more.
Trump’s animus toward Powell has been pretty overt. He has referred to the Fed Chair as “dumb,” “stupid,” “numbskull,” and “a disaster.” His frustration about Powell’s handling of monetary policy certainly comes across. The hostility reached a high point when Trump threatened to fire Powell last spring. That sounded great in theory, but after watching bond markets get spooked by his tariff proposals, he pulled the plug on that. The prospect of putting even greater stress on financial markets appears to have checkmated Trump’s hawkish plans, at least for now.
This continuing turf battle raises all sorts of implications for who will lead the Federal Reserve in the future. To amp up the drama, Trump is openly considering appointing himself to replace Powell. In the past, one would have been tempted to write off these statements as political bluster. In light of Trump’s previous efforts to pressure the Fed, we need to take them seriously.
The Congressional Showdown
In the recent congressional hearing, Powell’s demeanor contrasted sharply with Trump’s barbs. The Fed Chair’s answers on the inflation and tariffs question were remarkable for their candor. Yet it’s his candor that shocked many observers.
“We do expect tariff inflation to show up more,” – Jerome Powell
This comment is a clear indication of the Fed’s increasing alarm over inflationary pressures, due in part to the Fed’s global trade war. Furthermore, Powell acknowledged the uncertainty surrounding how these pressures would directly impact consumers:
“We really don’t know how much of that’s going to be passed through to the consumer. We have to wait and see.” – Jerome Powell
His comments highlight the additional complications that come from the merging of fiscal policy and global market forces. Unfortunately, Trump’s increasingly antediluvian rhetoric poses a far more direct threat to Powell’s continued presence on the Fed. More importantly, it significantly undermines the broader credibility of the Federal Reserve.
Trump is reportedly mulling a replacement for Powell and seems intent on moving quickly. He could put a “shadow chair” on the increasingly politicized Fed board before his successor is sworn in. All this maneuvering is seriously eroding the independence of the Fed. Many stakeholders are concerned that whoever is appointed next will prioritize Trump’s political agenda over a commitment to good economic policy.
Implications for Monetary Policy
This ongoing conflict shapes the implications here in profound ways. Analysts sound alarm bell. They’ve cautioned that if Trump is able to appoint a replacement chair who embraces his bizarre economic ideas, it would upend the rare equilibrium Powell has established—at great effort and with great risk—amid rising inflation.
A premature move to cut interest rates might spell disaster for both the U.S. and global economies. Other commentators have cautioned that such draconian actions could erode confidence in the Federal Reserve. That would likely send shockwaves through the bond markets, undermining fiscal stability.
The consequences of a bad move from such a change in leadership at the Fed could be disastrous. Fading faith in the Fed’s inflation-fighting mettle has set off an earthquake in the bond markets. The latter would have far-reaching economic consequences. The belief that the Fed has lost independence would only increase market turmoil and damage public confidence even more.
The Road Ahead
With a little less than a year left of Powell’s tenure, Trump is clearly bent on undermining his power as chair. His personal attacks through public disparagement serve as a larger deterrent. It conveys key signals to financial markets about where the likely policy shifts are on the horizon.
Regardless of the potential for appointing a new chair, it’s an opportunity to revisit some basic questions. What should be the Federal Reserve’s role, and how can the Fed function independently of political pressure. Trump’s eventual choice will certainly be scrutinized. The American public will view this decision as a presidential puppet instead of the completely autonomous guardian of monetary policy.
As this political drama continues to develop, bystanders will be paying very close attention to the actions taken by Trump himself and responses from Powell. The result will likely have a lasting impact on U.S. economic policy and the direction of global financial markets for years to come.
