Jerome Powell must quit to save the Fed, one prominent economist says

CNN

3 days ago

The Federal Reserve's independence from political interference, viewed as sacrosanct inside the central bank, is under siege.
President Donald Trump's relentless attacks on Federal Reserve Chair Jerome Powell are so intense that one prominent economist is raising eyebrows by arguing that Powell should quit to protect the central bank's independence.
'The attacks on Chair Powell are now extending to the whole institution. The longer Powell stays in power, the more that process will continue, fundamentally threatening the independence of the Fed,' Mohamed El-Erian, the former CEO of bond giant PIMCO, told CNN in a phone interview on Tuesday.
El-Erian, elaborating on a post he made on X, acknowledged his view is outside the consensus and 'very unpopular.' But he noted that Powell will effectively become a 'lame duck' the moment Trump announces a replacement, something that could happen much earlier than in the past, and that Powell leaving now would spare the Fed from months of attacks.
'The first best is that Powell remains until May when his tenure ends and the administration stops attacking the Fed,' he said in the interview. 'But that's not going to happen. We are nowhere near the world of first bests.'
El-Erian, a well-known economist who's also president of Queens' College of the University of Cambridge, added that most of the candidates who have been floated as potential replacements for Powell are 'credible' and 'respected' within the financial community.
'There will be market jitters, but ultimately the volatility will be less than the alternative, which is escalating attacks on the Fed,' El-Erian said.
Alan Blinder, the former No. 2 official at the Fed, told CNN that he 'couldn't disagree more vehemently' with El-Erian, who he knows and respects.
'This would be like saying when you're getting bullied, the best thing to do is cave in,' Blinder said during a phone interview. 'I'd much rather see – and this is what I expect – Powell to fight this until the end.'
'If Powell steps aside, it creates a terrible precedent for the future,' said Blinder, now an economics professor at Princeton University.
Ed Mills, managing director and Washington policy analyst at Raymond James, expressed a similar sentiment: 'Right now, if he were to resign, the optics would look as if Powell was forced out. It'd be terrible.'
For months, Trump has slammed Powell, his handpicked Fed chairman, for refusing to slash interest rates.
Trump argues that high interest rates are forcing the federal government to waste trillions of dollars to service the national debt. Washington now pays more in interest than it does to fund the military.
'I think he has done a bad job. He will be out in eight months anyway,' Trump said Tuesday at the Oval Office. 'People aren't able to buy a house because (Powell) is a numbskull and keeps the rates too high and probably doing it for political reasons.'
Former and current Fed officials say the US central bank must maintain its freedom to raise and lower interest rates based on economic realities, not the whims of politicians.
'In the end, either the administration realizes that Fed independence is in its own interest, or Fed independence will need to be supported by Congress and the courts,' Bill English, a former top official at the Federal Reserve, told CNN in an email.
English, now a professor at Yale University, said he doesn't 'buy the argument' from El-Erian that Powell should quit.
'If the administration wants political control over the Fed, I don't see how Powell's resignation helps avoid that,' English said.
Supporters of Fed independence point to the lessons of history, where the Fed and foreign central banks kept interest rates artificially low for political purposes – only to invite painfully high inflation.
'The Fed's credibility — its perceived willingness to make hard decisions based on data and nonpartisan analysis — is an important national asset. It is hard to acquire and easy to lose,' former Fed chairs Ben Bernanke and Janet Yellen wrote in a Monday essay in The New York Times.
Even one of Trump's own Cabinet members is defending the importance of Fed independence.
'Monetary policy — we should keep that off to the side. That should be in a jewel box and protected,' Treasury Secretary Scott Bessent said Tuesday during an interview on Fox Business.
While Bessent argued the Fed should review its non-monetary functions, he described Powell as a 'good public servant.'
'I know Chair Powell. There is nothing that tells me he should step down right now,' Bessent said on Tuesday. 'His term ends in May. If he wants to see that through, I think he should. If he wants to leave early, I think he should.'
The Raymond James executive added that the market reaction may be the opposite of what Trump wants.
'If Powell were to resign, rates would be more likely to go up than down,' Mills said.
That's exactly what happened, briefly, last week after investors grew alarmed that Trump could be moving towards firing Powell. Those fears temporarily drove down US stocks and the value of the US dollar, while lifting bond rates. Trump later said he's 'highly unlikely' to fire Powell – 'unless he has to leave for fraud.'
Yellen, who preceded Powell as Fed chair, told CNBC on Tuesday that the episode gives a 'taste' of how markets could react if Powell is fired.
'Importantly, markets rely on the independence of the Fed,' said Yellen, who served as President Biden's Treasury secretary.
For his part, Powell's past comments suggest the debate over his resignation is moot.
Asked about his job security in April, Powell said: 'I fully intend to serve all of my term.'
'I will never, ever, ever leave this job voluntarily until my term ends under any circumstances. None whatsoever. You will not see me getting in the lifeboat,' Powell told a Wall Street Journal reporter in a 2022 book. 'It doesn't occur to me in the slightest that there would be any situation in which I would not complete my term other than dying.'