Even if Trump "fires" Powell, the Fed is still unlikely to obediently cut interest rates.

According to media reports on Thursday, Trump has been discussing the possibility of firing Powell for several months. President Trump recently met with former Federal Reserve Governor Kevin Warsh to discuss the possibility of replacing the current Fed Chairman Powell. Some believe that Warsh is a top choice to eventually replace Powell. Powell's current four-year term will end in May 2026. Earlier, Trump has repeatedly criticized Powell, saying the Fed should have cut interest rates long ago, and that his dismissal should have come "sooner." Trump has repeatedly expressed his urge for the Fed to cut interest rates. The conflict between Trump and Powell seems to be becoming increasingly significant. Meanwhile, Powell's future is facing more and more uncertainty. On Monday, U.S. Treasury Secretary Steven Mnuchin said in an interview that he and Trump have been "considering" the next Fed Chairman and plan to start interviewing potential candidates in the fall. Renowned financial analyst Jim Bianco pointed out that Powell may face two fates - either being directly dismissed by the president or being substantially marginalized. It is reported that Mnuchin's proposed alternative last year was to appoint a "shadow Fed chairman," meaning appointing Powell's successor months in advance. This nominee might regularly appear on financial television programs, criticizing every speech and decision made by Powell, in order to weaken Powell's influence. However, Trump's nominee may not have the authority to arbitrarily lower interest rates. This is because the Federal Reserve Board of Governors and the Federal Open Market Committee (FOMC/rate-setting) are actually separate and do not have to be led by the same person. The FOMC is not obligated by law to elect the Fed Board Chairman (commonly referred to as the Fed Chairman) as the Chair of the interest rate-setting committee. They could simply elect someone else. However, since the establishment of the FOMC in 1935, the Fed Board Chairman has always concurrently served as the Chair of the FOMC to ensure that monetary policy aligns with the Fed's overall objectives, for efficiency and to avoid power decentralization, ensuring policy coherence. The main topic of discussion currently is whether Trump has the authority to dismiss Powell. U.S. legal precedents prevent the president from unilaterally dismissing the heads of independent agencies (the U.S. Supreme Court ruled on this in the case of Humphrey's Executor v. United States in 1935). However, the White House is seeking the Supreme Court to re-examine this law to clear the way for such action. But even if Trump were granted permission, the path to rate cuts is not direct if Powell were to leave the Fed entirely. In an extreme case, Paul Donovan, Chief Economist at UBS, has pointed out that the FOMC could elect someone other than the nominated Fed Board Chairman as the FOMC Chair. The FOMC Chair is elected at the first meeting every year. If the FOMC Chair resigns, the election will take place at the next meeting. In August 1979, then-Fed Chairman G. William Miller was appointed as Secretary of the Treasury by President Carter as part of a cabinet reshuffle. At the FOMC meeting on August 14 of the same year, Paul Volcker was elected as the new Chair of the FOMC. Volcker was quickly appointed as Fed Chairman a week before the meeting. However, in the scenario where Powell is removed, FOMC members might vote for someone other than Trump's carefully selected successor, such as New York Fed President Williams. Reports suggest that six years ago, during Trump's first term, when the possibility of Trump dismissing Powell arose, Fed leaders decided to "close ranks" and elected Powell as the FOMC Chair. Furthermore, Powell has stated that if Trump asks him to leave, he will not leave. So in the deadlock, Powell may continue to serve as FOMC Chair during any legal challenges. Moreover, to ensure that Trump's appointee for FOMC Chair receives votes, a major overhaul of the Fed Board personnel (as the president does not have the power to appoint regional Fed Presidents, they are nominated by the Board) may be required. Given concerns about global market reaction, this would be a potentially damaging blow to their reputation. Ultimately, the FOMC Chair only has one vote in setting interest rates. Although this position has the ability to pressure other voting members, the entire FOMC is unlikely to tear up their dot plots and start significantly cutting rates. In this context, despite Trump's intentions, sources have revealed that Warsh advised Trump not to dismiss Powell and not to interfere with his term, and Mnuchin also stated that Powell should not be removed as the Fed losing independence could have global market implications.