Trump's Renewed Attack on Powell Sparks Market Jitters
Threats of a lawsuit and replacement raise concerns over the Federal Reserve's political independence, echoing market volatility seen during his presidency.
A renewal of political pressure on the U.S. Federal Reserve is sending ripples of concern through financial markets, after former President Donald Trump threatened a “major lawsuit” against Chair Jerome Powell and signaled his intent to name a replacement long before Powell's term concludes in 2026.
The unexpected salvo, which Trump linked to alleged “gross incompetence” over a renovation of the Fed's headquarters, revives a contentious dynamic that previously injected significant volatility into the market. The remarks immediately raised alarms about the central bank's autonomy, a cornerstone of U.S. economic stability.
At the heart of investor concern is the principle of central bank independence, which insulates monetary policy from short-term political whims. An independent Federal Reserve is seen as crucial for managing inflation and fostering sustainable economic growth. Any erosion of this independence could undermine confidence in the U.S. financial system and the dollar.
"The politicization of the central bank's interest rate decisions has consistently been a source of market discomfort," analysts at Ainvest noted. The fear is that if policy decisions are driven by political motives rather than economic data, it could lead to higher inflation and greater instability in the long run.
This is not a new phenomenon. During his presidency, Trump’s frequent public criticisms of Powell and the Fed’s rate decisions often correlated with negative market reactions. Historical data shows that his sharp rebukes, at times labeling Powell an 'enemy', were often followed by stock market downturns and a weakening U.S. dollar as investors priced in the added uncertainty. Reports from that era showed that periods of intensified criticism shook market faith in the institution.
While a sitting president has the authority to appoint a Fed Chair, the power to remove one is highly circumscribed. The Federal Reserve Act stipulates a chair can be removed by the president only “for cause.” This has historically been interpreted as referring to illegal acts or gross misconduct, not policy disagreements. A politically motivated attempt to fire a Fed chair would be legally contentious and shatter a long-standing norm of American governance.
The latest threats inject a fresh dose of uncertainty at a sensitive time for the U.S. economy. Markets now face the prospect of a protracted political battle that could have significant implications for future monetary policy, interest rates, and the global standing of the U.S. dollar. While Trump said he would announce his intended replacement in January, the statement itself is enough to create a new risk factor that investors and policymakers cannot ignore.