Trump’s growing anger with Fed chief poses market risks

President Trump would likely find himself in murky legal waters if he attempts to dismiss Federal Reserve Chairman Jerome Powell, but experts say the bigger concern is that any move on that front would ignite a chain of calamities that could derail the global economy and financial markets.

Trump has frequently criticized Powell and the Fed for raising interest rates, and the president has reportedly polled advisers on whether to fire his hand-picked chairman.

While it’s uncertain whether Trump could remove Powell, making a drastic move against the central bank’s chief policymaker could unleash economic chaos at a time when the president prepares to seek reelection.

{mosads}An attempt to fire Powell would be an unprecedented test of the Fed’s independence and the laws meant to protect the central bank from politics in Washington. The move could also trigger a staggering stock market meltdown, spark intense congressional backlash and damage the country’s role as the world’s largest economy.

“If he were to actually be stupid enough to do it, it would trigger a massive reaction from financial markets that would be catastrophic to his entire presidency,” said Daniel Alpert, managing partner at investment firm Westwood Capital. “There will be all sorts of hell to pay.”

Trump has grown furious with Powell since July, when the president blasted the Fed chief following the second of what would end up being four rate hikes in one year. Despite previously insisting he wouldn’t encroach on the Fed’s independence, Trump reportedly mulled firing Powell last month during a brutal time for U.S. stocks, the worst December since the Great Depression.

Trump appointed Powell, a Republican, to chair the Fed in October 2017, five years after he was confirmed to the central bank as a governor on the board. The Senate confirmed Powell in January 2018 in an 84-13 vote, with almost all Republicans and a vast majority of Democrats supporting him.

Trump’s public rage with Powell breaks from decades of presidential restraint when it comes to monetary policy. And while Trump isn’t the first Oval Office occupant to attempt to sway the central bank, his predecessors kept their complaints largely behind closed doors.

{mossecondads}The Fed is considered critical to the stability of the U.S. economy, and its policies have profound influence over foreign counterparts. Analysts say if Trump threatens the Fed’s independence, it could throw the global financial system into chaos.

“Increased attacks on the Fed do more damage than they should,” said Karen Petrou, managing partner at Federal Financial Analytics.

Petrou said that while skepticism of the Fed is historically bipartisan, so is support for the central bank’s independence.

“They know the United States economy needs a stabilizing force that they doubt — correctly, I think — would come from the administration or Treasury,” Petrou said. “Even if you don’t like the Fed, you know how dangerous that would be.”

Without clear guidance from the Fed, global markets could be roiled by uncertainty and fears of growing instability triggered by internal turmoil at the central bank. Trump’s influence would also raise questions about the Fed’s loyalty to its dual mandate of stable prices and maximum employment.

“If investors don’t believe the Fed is independent, they’re going to bail,” said Mark Zandi, chief economist at Moody’s Analytics. “An independent central bank is key to a well-functioning financial system and economy.”

The president has the power to nominate the Fed board chairman, vice chairman and governors, but can only remove a Senate-confirmed Fed official “for cause” under the Federal Reserve Act.

A 1935 Supreme Court decision regarding presidential appointments to independent agencies defined cause as “inefficiency, neglect of duty, or malfeasance in office.” Legal scholars say that the standard probably doesn’t apply to political differences between the president and his appointee.

But Fed watchers say Trump could nominate a new Fed chairman to replace Powell while leaving him on the board as one of the bank’s seven governors. Fed chiefs are appointed to serve a four-year term as chairman and a 14-year term as a Fed governor concurrently, each approved through separate Senate votes. There are two vacant spots on the Fed board, which gives Trump some potential room to maneuver.

GOP senators are largely supportive of the Fed and its efforts to hike rates. If Trump attempts to replace Powell with a nominee less inclined to raise rates, he could face resistance from his own party.

Trump’s decision could also prompt a firestorm from top Democrats, including Rep. Maxine Waters (Calif.), who will lead oversight of the Fed as chairwoman of the House Financial Services Committee in the new Congress.

“My own view of it is that the president has the authority to move a sitting governor out of the chair and appoint a new one, but the new chair is subject to Senate confirmation,” Petrou said. “In my opinion, it’s impossible at this point to determine what the Republican Senate would do.”

Even if Trump can fire Powell, he may be powerless to stop the Fed from raising interest rates.

Monetary policy is decided by the Federal Open Markets Committee (FOMC), which consists of the Fed board and a rotating group of regional Fed presidents. While the FOMC is heavily influenced by its chairman, the panel could raise rates without Powell at the helm.

“I don’t think the issue is resolved by demoting Jay Powell,” said Alpert, who opposes further rate hikes. “The notion that somehow demoting [Powell] is going to change the opinion of the FOMC is ridiculous.”