Business Daily Media

Trump has threatened to fire the chair of the US Federal Reserve. That could be bad news for inflation

  • Written by Henry Maher, Lecturer in Politics, Department of Government and International Relations, University of Sydney
Supreme Court Building, in Washington D.C. United States of America

US President-elect Donald Trump has repeatedly threatened to fire the chair of the US Federal Reserve, Jerome Powell.

Up until this week, that may have seemed like a distant and outlandish prospect. Now, we again have to take it seriously.

Powell himself certainly is – and has already begun pushing back on the front foot. Responding to the threat on Thursday, he insisted[1] he will not resign. Further, he said any attempt by Trump to remove him was “not permitted under the law”.

Whether Trump actually attempts to follow through on his threat will provide an early litmus test of any potential authoritarian tendencies.

Powell’s dismissal would breach long-standing norms of central bank independence[2]. If successful, such a move could have a serious impact on democracy and the separation of powers, with consequences around the world.

Read more: Trump has vowed to be a 'dictator' on day one. With this day now coming, what exactly will he do?[3]

An old quarrel

The feud between Trump and Powell is nothing new. Trump himself actually appointed Powell to the Federal Reserve governorship back in 2018. However, like many of his other appointees, Trump soon turned against Powell.

Criticising[4] the Federal Reserve for not cutting interest rates quickly enough in 2019, Trump called Fed officials “boneheads”, accusing Powell of having “No ‘guts’, no sense, no vision!”

Beyond Trump, many economists have praised[5] Powell’s management of monetary policy, which has successfully reduced spiralling inflation rates. President Joe Biden was sufficiently convinced to appoint Powell to a second four-year term as chair which began in 2022.

Trump, though, only stepped up his criticisms, many of which became inconsistent with his earlier position. In February this year, he was suddenly blasting[6] Powell for even contemplating interest rate cuts.

Trump claimed baselessly that it was a political move by Powell – a lifelong Republican – to help Democrats win the presidential election.

US Federal Reserve chair Jerome Powell and US President Joe Biden speak together at a press conference
Jerome Powell’s current term as chair of the US Federal Reserve isn’t set to expire until May 2026. Susan Walsh/AP[7]

Could Trump actually fire Powell?

Trump has repeatedly[8] claimed he has the power to fire Powell, and that as president[9] he should have influence over the setting of interest rates.

The relevant legislation[10] holds that a member of the Federal Reserve board may be “removed for cause by the president”. But in this context, courts have interpreted “for cause” to refer to misconduct or impropriety. The president cannot remove the members of the board purely for policy or political reasons.

However, Trump could attempt to demote Powell from chair to an ordinary member of the Federal Reserve, and put another candidate in charge. Here, there is less of a legal precedent. Previous presidents have always assumed they did not have the power to do this.

US president-elect Donald Trump
Trump may attempt to set new legal precedents around presidential control. CJ Gunther/EPA[11]

The closest historical precedent[12] lies in an attempt by President Franklin Delano Roosevelt to fire the commissioner of the Federal Trade Commission in 1933. Here, the courts ultimately found in favour of the commissioner’s independence.

But the legal landscape has changed. It is possible that a Supreme Court sympathetic to Trump – which has previously found[13] in favour of expanded executive presidential power – might reach different conclusions.

Inflation, inflation, inflation

If Trump does attempt to remove Powell, it will radically affect the independence of the Federal Reserve. That could seriously impact its ability to set interest rates free from direct political interference.

This would likely increase inflation in the long run. If markets believe politicians are likely to interfere in the setting of interest rates to favour their own short-term political interests, investors will expect lower interest rates in the future.

This expectation alone is sufficient to cause inflation, and a major reason[14] why most developed countries now insulate their central banks from direct political control.

Ironically, promising to reduce inflation was a central plank of Trump’s successful election campaign. How Trump approaches Powell’s future will therefore be closely watched by markets.

Checks and balances

Trump’s view that the president should have power over both independent government agencies and interest rates reflects his widely noted “populist[15]” approach to politics.

Populist politicians claim to embody the popular democratic will. Accordingly, they often oppose institutional checks and balances on their powers, viewing them as impediments to the democratic mandate they claim to represent.

Supreme Court Building, in Washington D.C. United States of America
The ‘separation of powers’ has been historically been an important concept in the way the US government runs. Orhan Cam/Shutterstock[16]

The US political system has historically had a lot of checks and balances[17]. The idea is to limit the amount of power any one politician or party can accrue.

The “separation of powers[18]” – a cherished principle in the United States and beyond – seeks to spread power out across different institutions such as the judiciary, the legislature, the presidency and other independent institutions.

If Trump fires Powell, it will provide a strong indicator of how a second Trump presidency will approach the separation of powers, and suggest concerns about Trump’s future authoritarian intentions are justified.

Read more: With Trump returning to the White House, what will happen to his court cases?[19]

References

  1. ^ insisted (www.cbsnews.com)
  2. ^ central bank independence (www.imf.org)
  3. ^ Trump has vowed to be a 'dictator' on day one. With this day now coming, what exactly will he do? (theconversation.com)
  4. ^ Criticising (www.theguardian.com)
  5. ^ praised (www.economist.com)
  6. ^ blasting (thehill.com)
  7. ^ Susan Walsh/AP (photos.aap.com.au)
  8. ^ repeatedly (apnews.com)
  9. ^ president (fortune.com)
  10. ^ relevant legislation (www.law.cornell.edu)
  11. ^ CJ Gunther/EPA (photos.aap.com.au)
  12. ^ precedent (www.law.cornell.edu)
  13. ^ found (www.supremecourt.gov)
  14. ^ major reason (theconversation.com)
  15. ^ populist (theconversation.com)
  16. ^ Orhan Cam/Shutterstock (www.shutterstock.com)
  17. ^ checks and balances (www.usa.gov)
  18. ^ separation of powers (www.ruleoflaw.org.au)
  19. ^ With Trump returning to the White House, what will happen to his court cases? (theconversation.com)

Authors: Henry Maher, Lecturer in Politics, Department of Government and International Relations, University of Sydney

Read more https://theconversation.com/trump-has-threatened-to-fire-the-chair-of-the-us-federal-reserve-that-could-be-bad-news-for-inflation-243260

Retail Reinvented: How Technology and Consumer Confidence Will Shape 2025

As we approach 2025, Australia's retail sector stands at a pivotal juncture, influenced by evolving consumer behaviours, technological advancement...

SME Spending Signals Growing Confidence Among APAC Businesses: Instarem SME Spend Barometer

Inaugural report highlights spending behaviours among SMEs in Singapore, Australia, and Malaysia, revealing a strategic shift toward long-term gro...

Employment entitlements businesses need to know when hiring remote employees

In today's digitally connected world, companies are no longer limited by geographical boundaries when it comes to hiring. Tapping into overseas ta...

Remove the Guess Work in Location Planning

Planning where to open a new business location is a high-stakes decision. To help remove any guess work, Melbourne-headquartered GapMaps, a leader...

Employers and employees back Right to Disconnect but it’s complicated

Nearly three-quarters (74%) of Australian employers support the ‘Right to Disconnect’ legislation in Australia, according to a new survey by globa...

Financial headwinds continue to impact Australians as ASIC’s latest figures reveal more hardship ahead

WCT Advisory grows three-fold to handle increasing workload As the spiralling cost of living continues to wreak havoc on the average Australian...

Sell by LayBy