Why did Trump suddenly "let go" of Powell? Thanks to Besant and Lutnik.

Written by: Fang Jiayao, Wall Street Journal

Despite Trump's escalating criticism of Powell last week, he publicly stated on Tuesday that he does not plan to fire Powell and accused the media of misrepresenting his intentions.

On April 23, Eastern Time, media reports cited sources saying that the White House had taken Trump's public criticism of Powell very seriously, with even a White House lawyer privately researching legal options for removing Powell, including whether he could be removed for "cause", as according to the law, Federal Reserve Board members can only be removed for cause before their term ends, and courts typically interpret "cause" as misconduct or inappropriate behavior.

Additionally, Trump changed his mind regarding Treasury Secretary Mnuchin and Commerce Secretary Wilbur Ross, according to informed sources who said they warned Trump that firing Powell could lead to market turmoil and legal disputes. Ross told Trump that dismissing Powell would not change interest rates, as other members of the Federal Reserve might maintain a monetary policy similar to Powell's.

The market votes with its feet, Trump gives up on firing.

The media pointed out that Trump's remarks that he "does not intend to fire Powell" indicate that he and his advisers are still closely monitoring the reaction of Wall Street and big business.

Although Trump insists that he is not affected by market fluctuations, he and his advisors are clearly aware of the market's resistance to his aggressive trade and economic measures, and are gradually making compromises. After all, White House spokesperson Taylor Rogers has stated that presidential advisors will provide advice to Trump, but the final decision-maker is still the president himself.

Tesla CEO Elon Musk said on Tuesday's earnings call that he would advocate for lower tariffs in a conversation with the president. Musk said, "It's up to him to decide whether to listen to my advice or not." He will work less on DOGE due to Tesla's declining share price, and Tesla is also experiencing a decline in global sales due to Musk's relationship with the government.

During his first term, Trump frequently criticized Federal Reserve Chairman Powell and attempted to influence Federal Reserve decisions through social media and other means, but the effect was limited and did not have a substantial impact on the independence of the Federal Reserve. However, this time, concerns about the Federal Reserve's independence have significantly escalated for two main reasons.

First, Trump is more inclined to challenge the institutions and legal norms during his second term. The U.S. Department of Justice is attempting to overturn a legal precedent that has been in place for 90 years, which is an important safeguard against the dismissal of Federal Reserve officials before their terms expire. Many legal experts believe that once this precedent is overturned, the independence of the Federal Reserve will be seriously threatened.

Secondly, since Trump's tariffs are much larger than those during his first term and cover a wider range, this could lead to more serious inflation issues this year. Trump's tariff policy undoubtedly makes it more difficult for the Federal Reserve to weigh the trade-off between inflation and economic growth.

The cost of firing Powell is too high and the effect is limited.

But in reality, Trump faces many obstacles in firing Powell.

On one hand, the independence of the Federal Reserve is viewed by bond investors as a crucial pillar of the U.S. financial system. Many investors believe that the Federal Reserve should not be subject to government interference. If foreign investors are concerned that the U.S. government will interfere with the Federal Reserve to tolerate higher levels of inflation, they may reduce their purchases of U.S. Treasuries, which would drive up interest rates.

Tim Mahedy, former senior advisor and chief economist at the San Francisco Fed, stated last week that if Trump successfully forces the Federal Reserve Chairman to resign, the market's reaction will be catastrophic. The pain will come so quickly and violently that the president will be forced to immediately retract his commitments, or face a systemic financial crisis.

On the other hand, many Wall Street analysts believe that even if Trump fires Powell, it will not easily change the Fed's monetary policy, because the rest of the Fed's governors may not support a rate cut. Last month, for example, Trump promoted Bowman, the Fed governor he appointed during his first term, to vice chair for banking supervision. Bowman, one of the Fed's most outspoken officials, has warned of the risk of cutting interest rates too early or too soon.

Powell has consistently stated that he does not believe the independence of the Federal Reserve is under threat. Powell believes that if the Federal Reserve Chair were to be dismissed due to policy disagreements, it would put significant pressure on future Federal Reserve Chairs and could affect their decision-making freedom. To protect the Federal Reserve Chair's ability to make decisions without political pressure, Powell believes it is necessary to prepare for this potential legal conflict, even if he personally may incur costs as a result.

The issue of the Federal Reserve's independence is not new.

Since the high inflation of the 1970s, the Federal Reserve has placed great importance on its independence. At that time, U.S. President Nixon pressured the Federal Reserve to ease monetary policy, which resulted in severe inflation. The high inflation issue was ultimately contained through the economic recession of the early 1980s.

Although the independence of the Federal Reserve is not explicitly defined by law, this historical lesson has led to a consensus among the Federal Reserve, the president, and Congress that the Federal Reserve should have considerable independence to ensure that it can maintain low inflation and a healthy job market.

By the 1990s, many other countries' central banks also began to strive for greater independence, allowing them to make decisions on interest rates without government interference, thus better serving the long-term development of the economy.