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Overnight, the S&P 500 Index fell over 2%, 10Y UST yields rose to 4.40% and the USD declined to 1.15 against the EUR after President Trump again criticised Fed Chairman Powell for not cutting interest rates to avert a slowdown in the economy.
Financial markets fear Trump may try to fire Powell, compromising the Fed’s independence, stopping officials from setting interest rates freely and thus letting inflation soar as a weak Fed allowed in the 1970s as the chart shows.
Fed officials like other independent regulators are shielded from political interference by a precedent referred to as Humphrey’s Executor. In the 1930s, the Supreme Court ruled the US government had wrongfully dismissed an official for reasons other than those authorised by Congress. Currently, two labour regulators are suing the Trump administration for being fired earlier this year. If the Supreme Court rules Humphrey’s precedent still stands then the only way Powell or any other official at an independent US federal agency could be dismissed is ‘for cause’, for example, by being found guilty of insider trading or gross misconduct.
If Trump tries to replace Powell, we expect the Fed Chair would go to court and seek an injunction to stay in office until his term ends in May 2026. We also think most Fed officials would back him to keep interest rates elevated to continue curbing inflation, thus ruling out any cuts over the next few months.
Source: Bank of Singapore, Bloomberg
Powell’s ability to lead a co-ordinated resistance is due to the structure of the Fed. The seven Board of Governors including Powell, the New York Fed President and four of the other eleven regional Fed Presidents vote at each Federal Open Market Committee meeting. The Governors are nominated by the US President and confirmed by the Senate for 14-year terms. Traditionally, the President nominates one Governor to be the Fed Chair for a four-year stint. But it is the Federal Open Market Committee (FOMC) that elects the Chair.
If Trump tries to dismiss Powell before his term as Chair ends in May 2026, then Powell can stay at the Fed while fighting his case in court as his term as a Fed Governor only ends in January 2028. There will also be no vacancy on the Board of Governors until January 2026 when Kugler’s expires. Thus, Trump can’t replace Powell this year with a new Governor.
Last, if Trump decides to nominate another of the current Governors as Fed Chair, then the FOMC may not stand in the way. But FOMC officials instead would only vote to support the new Chair if he or she follows Powell and the majority of the FOMC in continuing to set interest rates to curb inflation.
Thus, any stand-off between the Fed and the White House would only be decided by the Supreme Court later in 2025. In the interim, the risk that the Justices do not protect the Fed’s independence would cause long-term UST yields to surge and the USD to plunge. The threat to Powell’s position is therefore a clear risk to the US outlook now.
This article was first published by Bank of Singapore on 22 April, 2025. The Opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of OCBC Private Bank or its affiliates.
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