The next Fed chair's dilemma: Maintain Fed independence while pleasing Trump
Even if the president doesn't remove Powell before his term is up in 10 months, he has made it clear that he wants the next Fed boss to do what he wants: Bring interest rates down.
"I'm only interested in low-interest people," he said Wednesday, while denying reports that he intended to fire Powell yet leaving the door open to doing so for "fraud."
The various candidates who are being considered by Trump have all expressed a support for lower rates, including National Economic Council Director Kevin Hassett, former Fed governor Kevin Warsh, Fed governor Christopher Waller and Treasury Secretary Scott Bessent.
Trump "is putting somebody in place who he says he expects to cut interest rates very aggressively," StoneX senior adviser Jon Hilsenrath told Yahoo Finance. "Whoever becomes the next Fed chair is going to have some implicit promise to live up to.'
Media reports this week suggested that Hassett is now rising as a leading candidate. He benefits from being close to Trump, having worked for the president during both of his terms, but whether Wall Street will view that as a shot to central bank independence remains an open question.
'Kevin has the qualifications to get the Fed job because he is close to the president,' Hilsenrath added. 'In terms of doing the Fed job well, I think it will be a real challenge.'
Hassett told NBC Wednesday evening that "everybody at the White House understands the independence of the Fed is super important." When central banks lose their independence, Hassett said, 'it's bad for the economy and bad for markets.'
Hassett did agree that rates should be lower than where they are right now, matching the easing cycles of other central banks around the world. And the fact that rates have not been lowered raises a "legitimate concern that independence of the Fed is not being respected by Fed members themselves."
Another candidate for Powell's job, Warsh, told CNBC Thursday that 'history tells us that the independent operations in the conduct of monetary policy is essential.'
'But that doesn't mean the Fed is independent in everything else it does,' he added, while arguing that the Fed's reluctance to cut rates "is actually quite a mark against them."
'Fed independence is a myth'
US history is full of examples where American presidents challenged Fed chairs, including a confrontation between President Johnson and Fed Chairman Bill Martin in the 1960s.
President Nixon also leaned on former Fed Chair Authur Burns to bring rates down before the 1972 presidential election. Nixon's White House even leaked false stories about Burns seeking a pay raise as way of undermining his authority.
'What's currently unfolding before our eyes has been happening for decades behind closed doors,' wrote JPMorgan Chase's Ilan Benhamou said in a note Thursday that cited the Johnson-Martin clash.
'What's happening for everyone to see is definitely damaging for the institution, but let's be honest, the Fed independence is a myth,' Benhamou added.
The pressure on Powell is not due to let up, with Trump and other White House officials continuing to raise questions about Powell's handling of a $2.5 billion renovation of the Fed's headquarters.
'It seems as though every single day now we have the White House beating up the Fed' and Powell 'in particular,' Yardeni Research president Ed Yardeni told Yahoo Finance.
Some Republicans are supportive of a Powell firing but others in that party that now controls Washington are starting to warn that any removal of Powell would in fact deal a blow to Fed independence.
'If anybody thinks it would be a good idea for the Fed to become another agency in the government subject to the president, they're making a huge mistake,' GOP North Carolina Sen. Thom Tillis said Wednesday.
Majority Leader John Thune of South Dakota added on Fox News Wednesday night that 'I think the markets want an independent Federal Reserve. I think they want a central bank that isn't subject to the whims of politics.'
Even Democratic Sen. Elizabeth Warren, a past critic of Powell, said Wednesday that 'markets will tank' if Trump fires Powell.
'When his initial attempts to bully Powell failed, Trump and Republicans in Congress suddenly decided to look into how much the Fed is spending on building renovations,' she added. 'Independence does not mean impunity and I have long pushed for more transparency and accountability at the Fed. But give me a break.'
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