The Real Reason Trump Won’t Try To Fire Jay Powell

Federal Reserve Chair Jerome Powell went viral on Thursday for his succinct answer to my question about whether he’d leave if President-elect Donald Trump asked him to.

His reply: “No.”

It was a strikingly confident response in a volatile political moment. What’s especially interesting is why Powell was in a position to speak with such assurance.

There’s the law, of course: Fed board members can only be removed “for cause” — not just policy disagreements. (It’s less clear whether the chair could be demoted, though disentangling the Fed chief from the interest-rate setting process would be difficult.)

But there’s another reason that holds particular weight with Trump: the stock market.

The president-elect has extensive leeway to set the agenda for the next four years, having cemented his dominance in the Republican Party in particularly dramatic fashion last week.

But Trump’s penchant for looking to stock prices as a measure of his success will still serve as a check on his instincts.

It did last time around: Trump considered firing Powell after the central bank raised interest rates in December 2018. Stocks did not like the prospect at all. Markets were already panicky about trade wars and slowing growth, as well as uncertainty around the Fed’s moves, and reports that Trump might try to remove the central bank head made it much worse.

Then-Treasury Secretary Steven Mnuchin tried to reassure investors by tweeting from his own personal account, the day before Christmas, a quote from Trump saying that he didn’t think he had the right to fire the Fed chief.

But the uncertainty still led to one of the worst pre-pandemic days for stocks during Trump’s presidency, according to data on the benchmark Russell 3000 index I got from the London Stock Exchange Group. Stocks breathed a sigh of relief on Dec. 26 when Powell remained in place; they rose roughly 5 percent.

Trump — likely not eager for a repeat of that experience despite his continued criticisms of Powell — has recently suggested that he would allow the central bank chief to serve out his current term, which ends in May 2026.

“I do think it’s going to be a bit of a check” on the incoming president’s relationship with the Fed, said Brian Gardner, who tracks Washington for financial firm Stifel. “The markets will not like interference by any administration, and once Trump sets the precedent, then every other subsequent administration is going to feel emboldened to walk through that door.”

It’s less clear how markets will shape Trump’s other policies.

Stocks have surged to all-time highs in celebration of an apparent Republican sweep — a harbinger of tax cuts and deregulation — but Wall Street also has lurking fears about a resurgence in inflation stoked by more tariffs and fewer immigrant workers.

That concern is one reason rates on longer-term government debt have been rising even though the central bank has begun to lower borrowing costs — a warning sign to Trump that even if he had more political influence over the Fed, it would be no guarantee of low rates.

The central bank guides markets. But while investors obsessively follow and react to the Fed’s every move, it does not actually control them.

For Trump, it will be much the same.

In his first term, the Republican president regularly caused asset prices to whipsaw with unexpected pronouncements, but most of that volatility was short-lived. And he would often react to soothe markets. When investors were getting jittery about trade tensions, for example, he would tweet about prospects for a deal with China.

Still, depending on how aggressively he follows through on his proposed policies, Trump might have less room to reassure investors this time around, according to market strategists I spoke to.

“The landscape is just totally different,” said Kevin Gordon, senior investment strategist at Charles Schwab.

Though the economy is solid overall, there are plenty of risks lurking for future policymakers. The Fed is still trying to cool inflation a bit further without hurting the job market, while trade-sensitive sectors like manufacturing and housing have recovered only sluggishly from the pandemic amid high rates. Meanwhile, government debt levels are much higher than they were, which could constrain Congress’ ability to increase deficits.

All of that makes an easy recipe for market jitters in reaction to policies out of Washington.

The extent to which Trump clashes with Powell will also probably depend on the stock market. It’s no coincidence that the last time the president-elect considered ousting the Fed chief, it was because Powell’s rate hike had sparked a selloff.

For now, the market keeps notching new highs, with the S&P 500 up over 26 percent this year — a much more Trump-friendly environment.

In 2020, the Fed chief played a central role in avoiding a financial crisis at the onset of Covid and helped markets turn around from a nosedive, and the president was pleased.

“I have been critical, but in many ways I call him my ‘MIP,’” Trump told reporters in May of that year. “Do you know what an MIP is? Most improved player. It’s called the Most Improved Player award.”

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