US President Donald Trump has backed away from his threats to dismiss Federal Reserve Chair Jerome Powell following several days of escalating criticism directed at the central bank leader for not lowering interest rates.
“I have no intention of firing him,” Mr. Trump informed reporters in the Oval Office yesterday.
“I would prefer to see him take a more proactive approach regarding his intention to reduce interest rates,” he added.
The de-escalation received an immediate positive response from Wall Street, as equity index futures surged by nearly 2% when trading resumed last night.
“Whether this is a reaction to Monday’s stark preview of what might occur in the markets if he pursued firing Powell, or if it was the strategy all along, it certainly is a positive development,” stated Evercore ISI Vice Chairman Krishna Guha.
“This significantly decreases the probability of worst-case scenarios, including stagflation and the transition of the tariff crisis into a sovereign debt crisis, though those risks still persist,” he further elaborated.
During his interaction with reporters yesterday, Mr. Trump also expressed confidence that a trade agreement with China could “substantially” lower tariffs, which further encouraged investors.
He indicated that a deal would lead to “substantially” reduced tariffs on Chinese goods, suggesting that a finalized agreement would not “be anywhere near” the current tariff rates. However, he added, “it won’t be zero.”
The combination of the tumultuous implementation of Mr. Trump’s tariffs, along with his recent criticisms of Mr. Powell and the Fed, had unsettled investors and heightened the selling pressure on US assets, including stocks, US Treasuries, and the dollar.
Mr. Trump’s attacks were often coupled with threatening comments, including a social media post from last week stating that Mr. Powell’s removal from his position as Fed chair “cannot come fast enough,” along with more personal insults like calling Powell “a major loser.”
These threats alarmed financial markets that regard the Fed’s independence as critical for maintaining its credibility as the world’s most influential central bank and a foundational element of global financial stability.
Although Mr. Trump appears to have set aside these threats for the time being, his critiques of the Fed’s rate policy remain as sharp as ever.
“We believe this is the perfect time to reduce the rate, and we would like to see our chairman act promptly rather than delaying,” Mr. Trump stated.
Old feud
Mr. Trump’s grievances with Mr. Powell date back to his first term as president. Mr. Trump appointed Mr. Powell from the Fed Board of Governors to lead the central bank but soon grew frustrated with the continued rate hikes under Powell’s leadership.
Mr. Trump openly contemplated firing Mr. Powell but was ultimately dissuaded by his advisors.
It remains uncertain whether Mr. Trump possesses the authority to do so. Mr. Powell, for his part, asserts that the Federal Reserve Act of 1913, which established the central bank, prevents such actions. Mr. Trump has claimed that if he wished to remove Mr. Powell, it would happen “real fast.”
The law specifies that the seven Fed governors, appointed by the president and confirmed by the Senate to staggered 14-year terms, can only be dismissed for “cause”—long believed to refer to misconduct rather than policy differences.
However, the law does not specify limitations on removal concerning the four-year term of the Fed chair, who is one of the seven governors.
Mr. Trump’s aggressive rhetoric coincides with ongoing court cases regarding his dismissal of officials from other independent federal boards and agencies.
These cases are being closely monitored within Fed circles as they may serve as a gauge for whether Mr. Trump has the authority to terminate Fed officials, who are generally thought to execute monetary policy free from political pressure.
The Fed lowered interest rates by one percentage point late last year to the current range of 4.25% to 4.5%, but has maintained these rates in the two policy meetings held since Mr. Trump returned to the White House. The Fed’s next meeting to set rates is scheduled for two weeks from now.
Fed policymakers are concerned that the aggressive tariffs imposed by Mr. Trump since early February might reignite inflation, which they have struggled to bring back to their 2% target.
Policymakers also fear that their job could be complicated if tariffs hinder growth and raise unemployment while simultaneously putting upward pressure on inflation.
The outcome is a cautious stance regarding additional rate cuts, although most policymakers still anticipate some likelihood of rate decreases later in the year.
Interest rate futures traders reduced their bets on Fed policy easing following Trump’s remarks, and are currently pricing in three quarter-point interest rate cuts by the year’s end, down from the four that were previously seen as more probable.
So far, “hard data” indicators of the US economy, such as employment and retail sales figures, have displayed resilience, yet surveys of households and businesses indicate rapidly declining confidence.
The prevailing consensus among economists is that the risks are largely tilted to the downside as the implications of tariffs begin to accumulate.
Yesterday, the International Monetary Fund downgraded its forecasts for both US and global growth this year, with Mr. Trump’s tariff policy identified as the main reason behind the revision.
