The rebound is over, is the next good news Trump firing Powell?

Author: Luke, Mars Finance

The U.S. financial market is experiencing severe turbulence. The March CPI data unexpectedly showed a cooling of inflation, with the year-on-year growth rate of core CPI hitting a four-year low and a month-on-month decline for the first time in five years. However, the threat of high tariffs from the Trump administration quickly overshadowed this positive news, raising concerns about an escalation in the trade war. U.S. stocks, the dollar, and cryptocurrencies faced sell-offs, while safe-haven assets like gold, the yen, and the Swiss franc surged. Amid market panic, a bold speculation emerged: Could Trump's firing of Federal Reserve Chairman Powell be the key to saving the market? This article analyzes this possibility based on the current market situation, delving into the legal, procedural, and market implications, revealing the game between Trump and the Federal Reserve.

CPI Gains Overwhelmed by Tariff War, Market Panic Resurfaces

The March U.S. CPI data should have injected confidence into the market. The year-on-year growth rate of core CPI fell to its lowest in four years, and the month-on-month decline was the first in five years, suggesting easing inflationary pressures. However, Trump's 145% tariffs on China and threats of high tariffs on Mexico and Canada ignited fears of a global trade war. The expectation that tariffs could push prices higher quickly overshadowed the positive news, leading investors to seek refuge.

On Thursday, the three major U.S. stock indices failed to continue Wednesday's rebound, with the S&P 500 briefly dropping over 6% during the day, nearing the circuit breaker threshold, and closing down 3.46%. Tech stocks led the decline, with Tesla falling over 7%. The cryptocurrency market was similarly bleak, with Bitcoin down 5.2% and Ethereum plunging 11.7%. The dollar index recorded its largest single-day drop since 2022, falling over 2% during the day. The safe-haven Swiss franc rose nearly 4% against the dollar, marking its largest intraday gain since 2015; the yen also rebounded. Gold performed impressively, with spot gold breaking through $3,170 during the day, reaching a historic high with an increase of about 3%.

The bond market reflected complex emotions. The yield on the ten-year U.S. Treasury bond briefly rose over 10 basis points, indicating rising inflation expectations. After the CPI data was released, the yield on the two-year U.S. Treasury bond plummeted over 10 basis points, with short-term yields retreating. The market turmoil stemmed from the dual threats of the tariff war: rising prices and dragging growth. This heightened attention on Federal Reserve policy, while the conflict between Trump and Powell became a focal point for the market.

Can Firing Powell Save the Market?

In the midst of market gloom, some investors view Trump's firing of Powell as a potential turning point. The idea is that if Powell were replaced with a chairperson inclined towards easing, the Federal Reserve might quickly cut interest rates, alleviating the pressure of high rates on the stock market and cryptocurrencies. If the tariff war pushes the dollar higher, the new chairperson might coordinate with exchange rate interventions to boost export competitiveness. This expectation is quite appealing under the desire for rate cuts.

However, the reality is far from simple. Firing Powell could undermine the independence of the Federal Reserve, triggering severe market volatility. The new chairperson may not fully comply with Trump, and historically, changes in chairmanship often come with uncertainty rather than immediate benefits. Additionally, inflationary pressures triggered by tariffs could limit the space for rate cuts. Whether firing Powell could truly become a "magic bullet" for saving the market requires an in-depth analysis from legal and procedural perspectives.

The Trump-Fed Conflict: Why the Hostility?

The conflict between Trump and the Federal Reserve is a naked political showdown, centered on his belief that the Fed, under Powell's leadership, is intentionally "cooperating with Biden and targeting him." This perception stems not only from policy differences but is deeply rooted in Trump's obsession with political loyalty and suspicion of "the establishment's" control.

Evidence of "Bias" in Trump's Eyes

Trump repeatedly accuses the Federal Reserve of being "too accommodating" during Biden's term. From 2021 to 2022, the Federal Reserve maintained low interest rates to support post-pandemic recovery, coinciding with Biden's push for large-scale stimulus plans, which Trump interpreted as "covert assistance" to the Democratic agenda. In contrast, during his term, Powell gradually raised rates starting in 2018, and maintained high rates in 2023-2024 due to high inflation, which Trump believes directly undermined his economic growth commitments and trade war efforts. He has repeatedly claimed at his 2024 campaign rallies: "Powell obeys Biden but sabotages me." Although this narrative lacks direct evidence, it resonates with his supporters' distrust of the "deep state," reinforcing Trump's image as a challenger to the establishment.

The Illusion of "Political Motives" at the Fed

From a political standpoint, the independence of the Federal Reserve itself is Trump's target. Powell emphasizes that decisions are based on data, but Trump sees this as "political camouflage." He believes that the Federal Reserve, as part of the Washington establishment, is inherently inclined to maintain the stability preferred by Democrats rather than support his radical "America First" reforms. For example, Powell's tolerance of inflation at the beginning of Biden's term was interpreted by Trump as "giving the Democrats a free pass," while the high rates during his term were seen as "deliberate obstruction." This cognitive bias stems from Trump's extremely high demands for loyalty: any institution that does not fully comply is labeled as "hostile."

The Amplifying Effect of Historical Context

Trump's suspicions are not unfounded. There have been many frictions between the Federal Reserve and Republican presidents throughout history, such as Reagan's criticism of Volcker. However, Trump's situation is more unique: he rose to power with an "anti-establishment" stance, viewing the Federal Reserve as a symbol of the elite. Powell, nominated by Trump, failed to show the expected loyalty and instead repeatedly emphasized independence in public, even suggesting in 2023 that he would not adjust policies due to White House pressure. This sense of "betrayal" convinced Trump that the Fed under Powell was intentionally standing against him, continuing the Democratic "moderate" path.

Catalyzing Voter Resonance

Trump has shaped the Federal Reserve into a "bureaucratic machine against public opinion," igniting grassroots voters' anger towards elite institutions. He claims that Powell "makes workers and businesses suffer," attributing high rates to "betrayal of ordinary Americans." This political rhetoric not only reinforces his image as a "fighter" but also obscures the complexities of the Fed's independence, further solidifying the narrative of "targeting Trump."

Trump's Attempt to Fire Powell and Historical Precedents

Trump's dissatisfaction with Powell has long been public. During the 2024 campaign, he repeatedly threatened to fire Powell. In February, he claimed Powell "misjudged inflation," threatening to "fire him if he doesn't listen." In July, he stated that the Fed chair should "listen like an advisor." These remarks have caused fluctuations in the dollar and U.S. Treasury yields, indicating the market's sensitivity to his intentions.

Trump's actions go beyond words. On April 9, Chief Justice Roberts signed an order temporarily allowing Trump to fire members of the NLRB and MSPB, suspending lower court (D.C. Circuit Court of Appeals) rulings restoring their positions, and requiring parties to respond by April 15. This case challenges the Humphrey's Executor precedent and aims to expand presidential control over independent agencies. If successful, it could open a legal loophole for firing Powell. During his first term, Trump attempted to intervene in the Federal Reserve, pressuring for rate cuts and nominating loyalists to the board, but he did not fully succeed, indicating his long-term goal of reshaping executive power.

Whether Trump can fire Powell depends on legal, procedural, and market factors, which will be analyzed one by one.

1. Legal Constraints and the Key Role of the Supreme Court

The Humphrey's Executor ruling states that leaders of independent agencies can only be fired for "just cause" (such as misconduct). The Federal Reserve Act provides similar protections for the Fed chair, with Powell's term lasting until May 2026. Trump's Supreme Court request argues that agencies like the NLRB exercise "substantive executive power" and should not be protected from dismissal. He may raise similar arguments regarding the Federal Reserve, claiming that the far-reaching impact of monetary policy means the chair should be directly controlled by the president.

In recent years, the Supreme Court has leaned towards expanding presidential power. The 2020 Seila Law case ruled that the single-director CFPB's protection from dismissal was unconstitutional; the 2021 Collins case further narrowed protections. However, the Federal Reserve is managed by a seven-member board, meeting the "multi-member expert committee" standard of the Humphrey's Executor, making its independence harder to shake. The temporary order on April 9 indicates the court's openness to Trump's demands, but the final ruling (expected in the summer of 2025) may only address the NLRB/MSPB and not necessarily cover the Federal Reserve.

If the Humphrey's Executor ruling is overturned, Trump might fire Powell on the grounds of policy disagreements, but he would need to prove "just cause." Powell's data-driven stance would be difficult to label as misconduct, and if fired, he could file a lawsuit, delaying the process.

2. Procedural and Political Resistance

After firing Powell, Trump would need to nominate a new chairperson, subject to Senate confirmation. The Republicans control the Senate, but moderates may oppose radical candidates, potentially prolonging the nomination process for months. During the transition period, the vice chair or a board member would temporarily assume the chair, and policies might continue as is, undermining Trump's expected effects.

Politically, firing Powell could trigger divisions within the party. Some Republicans support the independence of the Federal Reserve and fear that intervention could lead to economic turmoil. Powell is well-trusted in the financial community, and his dismissal could provoke public backlash. Internationally, a loss of independence for the Federal Reserve could weaken the dollar's credibility and affect capital inflows.

3. Market and Economic Consequences

Firing Powell could lead to short-term market volatility. The dollar might decline due to concerns over independence, and the stock market could briefly rise on rate cut expectations, but U.S. Treasury yields might climb due to inflation expectations. In the long run, if monetary policy is subject to political interference, it could lead to uncontrolled inflation and harm economic stability. The tariff war exacerbates inflationary pressures; if the new chair coordinates rate cuts or exchange rate interventions, it might alleviate the dollar's overvaluation, but inflation risks would be amplified.

4. Probability Assessment

• High Probability (25%): The Supreme Court overturns the Humphrey's Executor ruling, Trump attempts to fire Powell, but lawsuits and Senate resistance may hinder progress.
• Moderate Probability (55%): The court narrows dismissal protections, Trump pressures Powell to resign, but direct dismissal remains challenging.
• Low Probability (20%): The court maintains the status quo, and Trump can only indirectly influence the Federal Reserve through board nominations.

Conclusion

U.S. stocks and cryptocurrencies have plunged amid the dual pressures of cooling inflation and the tariff war, with safe-haven assets becoming a refuge for capital. Trump's firing of Powell is seen as a potential boon, but legal and procedural hurdles complicate its prospects. The Supreme Court's ruling will determine the president's control over independent agencies, while Powell's fate will depend on Trump's strategy and market reactions. In the short term, the market will struggle with uncertainty, and whether firing Powell can reverse the downturn remains to be seen.