Will Trump Fire The Fed?

(MENAFN- Jordan Times) CAMBRIDGE - Nearly every cabinet or staff appointment announced by US President-elect Donald trump has been met with a predictable wave of media outrage. Some of this hysteria can be attributed to deep-seated partisan biases, some reflects legitimate concerns, and some is pure nonsense.

When it comes to the US economy, however, the spotlight is on whom Trump might try to dismiss rather than whom he plans to appoint. Although Trump has said he will not seek to remove federal Reserve Chair Jerome Powell, whose term ends in May 2026, there is little doubt that Trump would love to tell Powell,“You're fired.”

Trump's antagonism toward Powell is baffling, given that Powell has been doing an excellent job. Though less visually thrilling than a SpaceX booster landing, the Fed's success in achieving a soft economic landing amid aggressive interest-rate hikes is no less spectacular. Such a delicate balancing act has been pulled off only once before, in the 1990s, when monetary“maestro” Alan Greenspan headed the Fed. Given that sharp increases in interest rates typically trigger recessions, economists often consider it a success when the resulting downturn is mild or at least brief.

While no US president has been quicker to fire his appointees than Trump – the former star of The Apprentice – outgoing President Joe Biden moved too far in the opposite direction, refraining from dismissing any member of his cabinet. Most notably, Biden stood by Homeland Security Secretary Alejandro Mayorkas despite Mayorkas's role in overseeing the administration's ill-considered“open borders” policy. And to Trump's credit, the leading candidate to replace Powell, Kevin Warsh, is a highly regarded former Fed governor who has consistently been even more hawkish than Powell.

But regardless of whether he fires Powell, Trump's bid to gain greater influence over the Fed's decision-making risks destabilizing inflation expectations and driving up long-term interest rates. While this process will probably unfold more gradually than some critics suffering from“Trump derangement syndrome” might expect, the consequences could be dire.

In the long term, any attempt by Trump to undermine the Fed's independence could severely impede its ability to respond to economic and financial crises. If inflation expectations are not firmly anchored, policymakers will struggle to stimulate the economy without triggering runaway price growth. Such a presidential“victory” over the Fed would reduce trust in other key institutions as well.

Fortunately, firing Powell is not so simple. While Fed chairs are appointed by the president, their terms are set by statute, which means the president does not have the authority to remove them. Trump could ask Powell to resign, but Powell has already made it clear that he will not step down.

That said, the Fed's independence is not enshrined in the US Constitution. With sufficient support from the Senate and House, Trump could amend the law to dismiss Powell. But for now, the Fed is shielded by the near-certainty that any serious attempt to override its independence would roil financial markets.

If removing Powell is not an option, Trump might name a“shadow” Open Market Committee to undermine Powell's authority and pressure the Fed. Trump has already done something similar with the presidency since being elected in November; the world pays far more attention to him than to Biden.

To be sure, this strategy is unlikely to have a meaningful impact on the Fed. Powell might face pointed questions about the policies of Trump's shadow Fed during congressional hearings or press conferences, but such a group would not carry more weight than other external critics. Unless it consistently outperforms the Fed in forecasting economic trends, a highly improbable scenario, Trump's shadow central bank will simply be ignored.

Still, the risks posed by Trump's approach should not be underestimated. Central-bank independence is arguably the most important macroeconomic-policy innovation since the supply-side revolution of the 1970s. While inflation targeting and the“Taylor rule” have played a pivotal role in shaping modern monetary policy, they rely on central banks' credibility and autonomy. Historically, central banks led by technocrats focused on maintaining price stability have consistently outperformed those plagued by political interference.

To understand the stakes, suppose Trump manages to fire Powell and pressures the Fed to keep interest rates low to boost economic growth, particularly during his first two years, before Democrats likely retake the House of Representatives. Longer-term interest rates – such as those on home and car loans, which the Fed does not control directly – would almost certainly rise, first gradually and then dramatically. Before long, the Fed would be forced to reverse course, eroding its credibility and weakening the US economy.

The good news is that for all his capriciousness, Trump is ultimately a pragmatist, not an ideologue. The long-term consequences of undermining the Fed's independence would be in no one's interest, including his own.

Kenneth Rogoff, a former chief economist of the International Monetary Fund, is Professor of Economics and Public Policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author (with Carmen M. Reinhart) of“This Time is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2011) and the author of the forthcoming book“Our Dollar, Your Problem” (Yale University Press, 2025). Copyright: Project Syndicate, 2025.

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