Last week, we spoke about President Trump having faced his Liz Truss moment, when he had to confront the financial market implications of his tariff announcements on “Liberation Day,” i.e., the contemporaneous selloff in US Treasuries and the US dollar. These were clear signs of investors losing confidence in the US as safe-haven nation. We also spoke about the many similarities between the two episodes, and the recent news gave us reason to return to the Truss experience.
In our recount of the Liz Truss episode, we brought up a key event, namely when the LDI trade of pension funds was at risk of imploding given the sell-off in gilts, forcing the Bank of England to intervene to stabilise the market. Crucial in this episode was that Bank governor Andrew Bailey announced that he would not renew the emergency gilt-buying facility, as it was the government that would need to fundamentally address the causes of the sell-off, specifically the unsustainable nature of the mini budget. As Liz Truss refused to do address this, the only chance she had was to resign, and pass on the leadership to Rishi Sunak, the former Chancellor of the Exchequer.
But a key aspect of that episode was that she considered firing Andrew Bailey during these momentous days, something that luckily she decided not to do. If she had fired Bailey, the Bank of England, even under a different governor, would still have not renewed the facility on time, yet the signal sent to investors would have further destabilised the market.
Apparently, the same situation is happening in the US right now. There have been multiple press reports suggesting that Trump is mulling the idea of firing Jerome Powell as Fed Chair, given his refusal to lower interest rates, in spite of the deteriorating economic conditions caused by Trump’s reckless decisions. Actually, at a recent event in Chicago, Powell said that the level of tariffs announced by Trump is much larger than had been anticipated by the Fed, and so too may be their economic consequences in terms of reduced growth and higher inflation. This defiant message has reportedly infuriated Trump, who wrote on social media “Powell’s termination cannot come fast enough.”
Now the question is: can Trump legally fire Powell? According to the law, and court interpretations of it, the answer is “no”; not without a cause such as criminal activity or malfeasance. Trump, who himself appointed Powell at the end of Janet Yellen’s term in 2018 (he was then confirmed by Biden in 2022), has previously tested the possibility of doing so in 2019, but did not do so once he realised that it was much harder than expected. (Also, because eventually the Fed did cut rates “preventively” three times in 2019).
The other question is: Will Trump fire Powell anyway, and what would be the effects of this? If Trump tried to force Powell’s hand and force him to resign, or if Trump were to adopt any other form of coercion in order to get rid of Powell, the market would respond very negatively. The Fed is the only credible institution remaining in the US: if it was perceived that Powell’s independence is gone, there would be little left to defend the US Treasuries and dollar.
The final question is: What else can Trump do to reduce Powell’s influence? One theory is that the process of appointing either an existing FOMC member (such as Kevin Warsh) or a new FOMC member as the new Fed chair will begin much sooner than Powell’s mandate’s natural end in May 2026. This way, this other person can always express his or her views after every FOMC meeting, and thereby overshadow Powell’s views and remarks. That is the reason why Treasury Secretary Scott Bessent said that they will begin the appointment process already in the fall, many months before the end of Powell’s term.
