On Tuesday, President Donald Trump stepped back from his earlier threats to dismiss Federal Reserve Chair Jerome Powell, following a series of pointed criticisms aimed at the central bank leader for not reducing interest rates.
“I have no plans to fire him,” Trump stated to reporters in the Oval Office. “I would prefer to see him take a more proactive stance regarding interest rate cuts,” he added. This shift in tone quickly resonated positively on Wall Street, as equity index futures surged nearly 2 percent with the resumption of trading on Tuesday evening.
The previous day, stocks, bonds, and the US dollar had all taken a hit after Trump criticized Powell’s reluctance to lower interest rates further since he resumed his presidency in January.
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Evercore ISI Vice Chairman Krishna Guha commented, “Whether this development stems from Monday’s harsh market response to the idea of firing Powell or was always part of the strategy, it’s certainly a positive sign. It significantly lessens the risk of worst-case scenarios, including stagflation and a potential sovereign debt crisis, though these threats still linger.”
During the same Q&A session, Trump expressed hope that a trade agreement with China could lead to “substantially” reduced tariffs, which also lifted investor sentiment.
He noted that a deal would bring “substantially” lower tariffs on Chinese imports, indicating that the final agreement would not “be anywhere near” the current levels but added, “it won’t be zero.”
The tumultuous implementation of Trump’s tariffs, combined with his ongoing criticisms of Powell and the Fed, had unsettled investors, resulting in increased selling of US assets including stocks, Treasuries, and the dollar.
Trump’s sharp remarks often included threats, such as a recent social media post stating that Powell’s dismissal “cannot come fast enough,” and personal jibes calling Powell “a major loser.” These comments unnerved financial markets that regard the Fed’s independence as vital to its credibility as a leading global central bank and a key element of financial stability worldwide.
Nevertheless, while Trump seems to have momentarily shelved those threats, his critiques of Fed policy remain unyielding.
“We believe it’s the perfect moment to lower the rates, and we would like our chairman to act timely rather than delay,” Trump remarked.
The tension between Trump and Powell dates back to the former’s first term. Trump appointed Powell as the head of the Fed, but soon grew frustrated with the continued rate hikes during Powell’s tenure.
Despite expressing the desire to fire Powell, Trump was ultimately deterred by his advisors. The question of whether he possesses the authority to do so is still ambiguous. Powell asserts that the Federal Reserve Act of 1913, which established the central bank, does not allow for such actions. Meanwhile, Trump has claimed that if he wished to remove Powell, it would happen “very quickly.”
According to the law, the seven Fed governors—who are chosen by the president and confirmed by the Senate for staggered 14-year terms—can only be dismissed for “cause,” which has traditionally meant misconduct rather than differences in policy. However, the law does not explicitly outline removal restrictions for the four-year term of the Fed chair, who is among the seven governors.
Trump’s severe language coincides with ongoing legal proceedings regarding his dismissal of officials from other independent federal boards and agencies, which are being closely monitored within the Fed as potential indicators of whether Trump can remove Fed officials who are typically believed to operate free from political pressures. The Fed lowered interest rates by a full percentage point late last year to the current range of 4.25 percent to 4.50 percent but has since held them steady in the two policy meetings since Trump returned to office. The Fed’s next rate-setting meeting is scheduled for two weeks from now.
Policymakers at the Fed are worried that the aggressive tariffs imposed by Trump since early February could reignite inflation, which they have been struggling to bring back to their 2 percent target. Concurrently, they are concerned that tariffs may hinder growth and result in higher unemployment, all while exerting upward pressure on inflation.
This scenario leads to a cautious wait-and-see approach concerning further rate cuts, although most policymakers still anticipate some reductions later this year.
Traders in interest rate futures have reduced their expectations for Fed policy easing following Trump’s comments, now anticipating three rate cuts of a quarter-point each by the end of the year, compared to four that seemed likely not long ago. Up to this point, “hard data” reflecting the US economy, such as employment and retail sales statistics, have shown resilience, yet surveys of households and businesses indicate a significant decline in confidence. Economists now broadly agree that risks are predominantly skewed to the downside as the impacts of tariffs begin to unfold.
This Tuesday, the International Monetary Fund revised its projections for both US and global growth downward, attributing the downgrade primarily to Trump’s tariff policies.