It is not easy for Trump to replace Powell? A detailed analysis of the stability of the Fed chair position.

According to the Federal Reserve Act, governors can only be removed for "good cause" and not for policy disagreements. The Supreme Court specifically ruled in Trump v. Wilcox that the Fed is a uniquely structured quasi-private entity and enjoys special protection. If Trump chooses to dismiss Powell for "good cause (renovation)," it could lead to a lengthy legal process. Some analyses suggest that by then, Powell's term is likely to end.

Written by: Dong Jing

Source: Wall Street Journal

Although Trump has consistently criticized Powell for not cutting interest rates and has made remarks about possibly replacing the Fed chair, it is actually not easy to remove Powell, as the legal and institutional framework provides multiple protections for the Fed chair.

This Wednesday, a rumor about Trump possibly firing Fed Chairman Powell triggered a sharp market fluctuation within just one hour. According to a previous article by Jianwen, this clearly demonstrates the financial shocks that may arise when the independence of the Fed is subject to political interference, exposing the market's sensitivity to the risks of monetary policy independence.

On July 18, according to news from the Chase Trading Desk, JPMorgan recently pointed out in a research report titled "How safe is Powell‘s job?" that despite political pressure, multiple legal and institutional safeguards make Powell's position relatively stable.

JPMorgan economist Michael Feroli detailed in a report the legal protections of Powell's position, arguing that the Supreme Court's ruling in Trump v. Wilcox provided special protection for the Fed, explicitly stating that "the Fed is a uniquely structured quasi-private entity," which provides the legal basis for Fed governors to be shielded from the president's "arbitrary dismissal."

In addition to the legal barriers providing multiple protections for Powell, JPMorgan also pointed out in its research report that the governance structure of the Fed limits the president's influence over monetary policy.

Legal barriers provide multiple protections for Powell

JPMorgan economist Michael Feroli pointed out in a report that according to the Federal Reserve Act, Fed governors can only be removed for "just cause," which has historically been understood as malfeasance or neglect of duty, rather than policy disagreements.

In the 1935 case of Humphrey's Executor v. United States, the Supreme Court ruled unanimously that the president cannot remove members of the Federal Trade Commission who enjoy "cause" protection due to political differences.

The "Humphrey's Executor" case is an important precedent set by the U.S. Supreme Court in 1935. This case established the principle that the president cannot arbitrarily dismiss the heads of independent regulatory agencies due to policy disagreements. This precedent has long protected independent institutions like the Fed from direct political interference by the president.

JPMorgan emphasized that the key point is that the Supreme Court's ruling in Trump v. Wilcox in May provided the Fed with special status.

According to the Supreme Court ruling in the case "Trump v. Wilcox", the court approved President Trump’s removal of two Democratic officials from the National Labor Relations Board (NLRB) and the Merit Systems Protection Board (MSPB), despite there being no lawful grounds for their dismissal, calling it part of the exercise of presidential executive power. However, the majority opinion of the Supreme Court specifically stated:

"The Fed is a uniquely structured quasi-private entity that continues the unique historical traditions of the First and Second Banks of the United States." This grants the Fed a special status, protecting its board from "arbitrary removal."

Even if Trump tries to dismiss Powell for "just cause," the reason currently being discussed is the cost overruns for the renovations of the Fed headquarters.

However, JPMorgan pointed out that historically there has been a lack of precedents for defining the boundaries of "just cause" for the dismissal of independent agency heads. If the government chooses this path, it could lead to a lengthy legal process, which is not good news for the market.

According to previous articles, if Trump really fires Powell instead of merely pressuring him to resign, Powell is likely to file a lawsuit to block this action, and the case will likely end up being submitted to the Supreme Court for trial.

One scenario speculated by analysts is that the Supreme Court may allow lower courts to keep the injunction preventing Trump from firing Powell in place during the case's proceedings. Wolfe Research stated: "This is likely sufficient for him to complete his term as chair."

Institutional Design Limits Presidential Influence on Monetary Policy

The design of the Fed's system itself limits the president's direct influence on monetary policy.

The Federal Open Market Committee (FOMC) consists of 12 members: 7 members of the Board, the President of the New York Fed, and 4 rotating regional Fed Presidents. This structure disperses decision-making power, making it difficult to immediately change policy direction even if some personnel are replaced.

7 governors are nominated by the president and confirmed by the Senate, serving a term of 14 years. The chairman and vice chairman of the Fed are nominated by the president from among the governors, confirmed by the Senate, and serve a term of 4 years, which can be renewed. Powell's term as a governor lasts until January 2028, and his term as chairman lasts until May 2026.

JPMorgan stated that even if Powell is stripped of his chair position, he can still remain as a governor until January 2028, and may even be elected as the committee chair by the FOMC, thereby maintaining actual leadership in monetary policy formulation. This arrangement would prevent the government from appointing a new governor and could possibly maintain the continuity of monetary policy.

From a personnel perspective, Trump's ability to influence the composition of the Fed through normal personnel appointments is limited during his remaining term. According to the current term arrangement for board members, most members will not leave during their full 14-year term, usually for personal reasons, which gives the president some patience to wait for vacancies.

The impairment of independence will increase inflation risks

The research report points out that economists generally believe that separating monetary policy from the political cycle is beneficial. The short-term perspective of the election schedule may tempt politically oriented monetary policy makers to stimulate the economy at inappropriate times.

International evidence indicates that central banks with greater political independence tend to promote lower and more stable inflation.

Historical records show that political intervention led to poor monetary policy in the late 1960s and early 1970s, which had adverse consequences for the development of inflation.

Any weakening of the Fed's independence could increase the upside risks to the inflation outlook, which is already facing upward pressure from tariffs and slightly rising inflation expectations.

In addition, market participants may demand greater compensation for inflation and inflation risks, leading to higher long-term interest rates, which could drag down the outlook for economic activity and worsen fiscal conditions.