Can President Trump fire Powell? Inside the process to fire a Fed Chair

Key Concepts:

• Fed Chairman removal process
• "For cause" removal standard (neglect, abuse, malfeasance)
• Fed independence
• Pretext
• Inflation expectations
• Seigniorage
• Historical presidential interference with the Fed

1. Possibility of Firing Fed Chairman Powell

• President Trump stated it's "highly unlikely" he will fire Fed Chairman Powell, but previously made similar statements before expressing contrary sentiments.
• Jonathan Kanter suggests Trump is laying the groundwork to remove Powell "for cause," citing cost overruns at the Fed headquarters renovation project.
• The legal standard for firing a Fed Chair "for cause" is very high, requiring neglect, abuse, or malfeasance. There are few historical precedents.

2. Legal Process and Court Involvement

• If fired, Powell would likely sue, seeking a stay based on the illegality of the firing.
• The case would likely go to the Supreme Court to determine if the president has unlimited authority to fire the chair. The Supreme Court has signaled it would likely side with the fed chair.
• If the Supreme Court sides with Powell, the case would be sent back to a district court to determine if the president had a legitimate basis to fire the Fed Chair.
• Powell would likely argue the stated reason (cost overruns) is a "pretext" for disagreement over monetary policy (interest rates).

3. Fed Renovation Project and Funding

• The Fed headquarters renovation project involved addressing lead contamination and raising the building.
• The project is funded by the Fed's money, not directly by taxpayer money.
• The Fed returns excess funds to the Treasury through "seigniorage," so reduced Fed funds could indirectly affect taxpayers.
• All members of the Board of Governors voted for the renovation project.

4. Pretext and Evidence

• Powell's defense would likely involve arguing that the stated reason for firing is a pretext.
• The court could hold an evidentiary hearing, examining internal documents and public statements to determine the true reason for the firing.
• Trump's prior comments about wanting to get rid of Powell because of high interest rates could be used as evidence of pretext.

5. Fed Independence and Interest Rates

• Obsessing about Fed independence can paradoxically make the Fed less independent, as lowering rates might be perceived as succumbing to executive branch pressure.
• The market is backing away from expectations of rate cuts, with September fed fund futures down to 57%.

6. Powell's Monetary Policy and Tariffs

• Kevin Warsh's view is that the Fed's duty is to prevent changes in relative prices from becoming embedded in the economy.
• Powell has stated the Fed's obligation is to keep longer-term inflation expectations well-anchored and prevent a one-time price increase from becoming an ongoing inflation problem.
• Powell's policies may be helping to contain inflation despite tariffs, potentially benefiting Trump.

7. Presidential Motivations and Scapegoating

• Trump may be setting up Powell as a scapegoat for potential future economic problems (inflation or stagflation).
• Presidents have historically had conflicts with Fed Chairs (Reagan, Eisenhower, Truman, Johnson).

8. Historical Presidential Interference

• President Johnson reportedly physically intimidated a Fed Chair.
• In 1935, Congress specifically removed the phrase "at will" from the Federal Reserve Act, indicating that the president cannot fire the Fed Chair at will.

9. Notable Quotes

• President Trump: "It's highly unlikely I will fire a Fed Chairman Powell."
• Jonathan Kanter: "...these cost overruns, which seem unlikely to satisfy the legal standard, are the actual basis for the firing, or whether it's a dispute over policy in this case, interest rates."
• Kevin Warsh: "It's the Fed's duty designated by Congress to ensure that changes in relative prices don't become embedded in the economy."
• Jay Powell: "Our obligation is to keep longer term inflation expectations well anchored and to prevent a one time increase in the price level from becoming an ongoing inflation problem."

10. Technical Terms

• Seigniorage: The profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs.
• Pretext: A reason given in justification of a course of action that is not the real reason.
• Stagflation: Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Synthesis/Conclusion:

The discussion centers on the possibility of President Trump firing Fed Chairman Powell, the legal hurdles involved, and the potential motivations behind such a move. The "for cause" requirement for firing the Fed Chair sets a high legal bar, and any attempt to remove Powell would likely be challenged in court. The discussion also highlights the historical tension between presidents and the Fed, the importance of Fed independence, and the potential for Powell to be used as a scapegoat for future economic problems. The Fed's monetary policy and its impact on inflation, particularly in the context of tariffs, are also key considerations.