While past presidents have been critical of the Federal Reserve from time to time, theres little precedent for the degree of Trumps attacks on monetary policy. Heres what you need to know.
Can Trump oust Powell?
What's going on now is unprecedented in the history of the Fed, Ken Kuttner, a former staff economist at the central bank, said in an email. Firing Powell would be crossing a really bright red line although that hasn't stopped Trump before, so you never know.
In addition to the chairman of the Federal Reserve Board of Governors, Powell also serves as chairman of the Federal Open Market Committee and as a governor himself. Trump could arguably fire Powell as chair of the Board of Governors, according to Peter Conti-Brown, a legal scholar at the University of Pennsylvania professor and the author of a political history of the Federal Reserve.
Under the Federal Reserve Act, a governor can be removed for cause. While this isnt defined in the statute itself, courts have taken it to mean hes guilty of negligence, malfeasance or dereliction of duty.
On Friday, Powell said he would not resign if Trump asked him to. Because Trump doesn't have authority to fire him as chairman of the Federal Open Market Committee, according to Conti-Brown, that means the typical trio of positions Powell holds could be broken up.
Then we might be in a world where we have two chairs where those roles were separated. I really hope it never comes to that, he said. Because that would lead to chaos and confusion in markets and in the economy.
How would financial markets react?
Probably not in a positive way.
Those in the Oval Office have historically avoided commenting on interest rates out of respect for the Federal Reserve, a signal that investors can count on stable monetary policy. Former President Richard Nixon successfully pressured his appointee Arthur Burns, for instance, but his broadsides occurred behind closed doors. (And that didnt work out too well .)
I'm guessing the markets would react very badly to his firing, said Kuttner. Markets value stability and such blatant intervention would create a huge amount of uncertainty.
Even members of Trumps cabinet, including Treasury Secretary Steven Mnuchin and acting White House chief of staff Mick Mulvaney , have walked back comments about ousting Powell. The White House did not immediately respond to an email requesting comment.
Leaders in his own party and in the business community would signal a lack of support, probably pointing to the potential turmoil in the markets and the economy that would follow, said Gregory Wawro, a political scientist at Columbia University.
But firing Powell would mean lower interest rates, right?
Removing Powell as Fed Chair wouldn't necessarily have any effect on short-term rates. The target range for the benchmark interest rate is decided by the Federal Open Market Committee, made up of 12 officials, not by Powell alone.
We tend to personalize monetary policy in this country, associating it with the chair but that's a mistake, Kuttner said. What seems to be lost on Trump is that the Chair gets only one vote on the FOMC, just like everyone else.
Even if it did, lower interest rates arent necessarily positive for the economy. Theres bipartisan consensus among economists and lawmakers that tightening monetary policy can be necessary to avoid high levels of inflation.
Would it have long-term consequences?
In the long-run, ousting Powell could undermine confidence in what is perhaps the most powerful central bank in the world.
[Firing Powell] would likely do far more to undermine the continued recovery of the economy under President Trump than the Fed's raising of interest rates, said Adam Ozimek, an economist at Moodys. Economists and market participants understand that an independent central bank is a requirement, and not an option, for a well-functioning and economically healthy country.
Even if Powell keeps his job for the rest of his four-year term, damage to the Federal Reserve may already be done. On Twitter alone , Trump has complained to 57 million followers about the central bank nearly a dozen times since taking office.
Institutional damage and erosion is virtually impossible to measure in the moment, Conti-Brown said. If future presidents think its completely appropriate to criticize and try to reshape Fed policy day by day, as opposed to through the appointment process, that will be very damaging to institutional credibility.
SEE ALSO: An ugly economic lesson from the Nixon era proves why Trump's criticisms of the Fed are so worrying
