Will Trump Fire Jerome Powell?
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President Trump is clashing with the Federal Reserve once again, this time over the central bank's response to his tariffs and their consequences. Chairman Jay Powell this week in remarks in Chicago was cautious, and President Trump wants interest rate cuts now, rapidly.

So what's at stake for the economy, for monetary policy, for the Federal Reserve and its independence, and for Jerome Powell's tenure as chairman of the Federal Reserve? That's our subject for today on Potomac Watch.

the daily podcast of Wall Street Journal Opinion. I am Paul Gigot, and I'm here with Joe Sternberg and Mary Anastasia O'Grady. So let's listen to Jerome Powell this week, Wednesday, talking, I think it was the Chicago Economic Club, about the impact of tariffs as he sees it on the conduct of monetary policy going forward. The administration is, as I mentioned in my remarks, is implementing significant policy changes, and particularly trade now is the focus.

And the effects of that are likely to move us away from our goals. So unemployment is likely to go up as the economy slows in all likelihood, and inflation is likely to go up as tariffs find their way, and some part of those tariffs come to be paid by the public.

So that's the strong likelihood. And, you know, my hope is that we'll get through this and get back. We're always going to be aiming for maximum employment and price stability. That's what we do. I do think we'll be moving away from those goals probably for the balance of this year and then or at least not making any progress. And then we'll resume that progress as we can. So very, very interesting. Powell basically saying that progress toward the Fed's target of 2% inflation is

and full employment, the other part of its mandate, will be difficult to reach for the rest of this year. Now, that didn't sit well at all with President Trump, who replied on social media Thursday morning with this broadside. The ECB, that is the European Central Bank, is expected to cut interest rates for the seventh time, and yet too late, quote unquote, Jerome Powell of the Fed, who was always too late and wrong, said,

Yesterday issued a report which was another typical complete mess. Oil prices are down, groceries, even eggs are down, and the USA is getting rich on tariffs. Too late should have lowered interest rates long ago, but he should certainly lower them now. Powell's termination.

cannot come soon enough. So I want to parse that statement by the president in different bits. But let's first talk about what Powell said, Mary. Was he right in talking about the impact of tariffs on inflation and unemployment? It's definitely right. Let's just clarify that the tariffs do not have to be inflationary as long as the central bank does not put more money into the economy.

What might happen is you have some prices going up, people making alternative decisions about what they buy or buying less, and inflation stays intact. But the problem is there will be pressure on prices to go up. And so you could have a one-time movement in the price level. That's not inflation. But if expectations of consumers start to

rise so that people think more inflation is coming. That's when they start to spend more in the near term because they know that something will be more expensive in the future. And that is inflationary. So his job is to ensure that that doesn't happen by keeping a lid on the availability of money. And that's what Trump doesn't like because Trump thinks that he should cut

the Fed funds rate and be more accommodating on the monetary side. So there's a standoff there. Right. The other side of what Powell said, Joe, was that the tariffs are likely to have a negative impact on growth. Tariffs are taxes, as we know. They're taxes assessed on imports.

And taxes are an impediment to growth. They retard economic activity. So he's saying, on the one hand, you're going to get this bump up in prices that Mary talked about, which could be one time once, you know, if you go from 2% average tariffs to a 10% average tariff, which we're going to get at a minimum.

That's a one-time bump up in the price level. But he's also going to get lower growth. So there's a risk here of stagflation, as I read between the lines what Powell was saying. Yes. And, you know, we toss around the term stagflation a lot to describe this situation where the economy is slowing at the same time that price rises or accelerating. But here,

I think it's particularly apt because of that sense of stagnation. I mean, it's important to understand that the kind of economic disruption that we're worried about right now as a result of the tariffs

is going to last for a very long time if the tariffs stay in place, because it is going to take potentially years for you to see the kind of rebuilding of an industrial base in the U.S. that the Trump team wants, if that even happens. And meanwhile, you are going to be stuck in this very tenuous economic situation with people not sure exactly how they should be investing or where they should be investing or what the policy is going to be. And I think that Powell's point is that this scenario

is always a nightmare for the central bank. And if anything, it's a little more nightmarish than he was letting on because not only do they have the specific policy dilemma of should you lean into supporting the growth side of the economy with lower interest rates if that helps,

or should you focus on containing the inflation? But there's also this political problem that the Fed ends up becoming a punching bag, which in fact seems to be what Trump is partly trying to do here. Punching bag indeed. All right, we're going to take a break. And when we come back, we're going to talk about the particular dilemma that Jay Powell has as he confronts Donald Trump's tariffs when we come back.

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Welcome back. I'm Paul Gigo here on Potomac Watch with Mary Anastasia O'Grady and Joe Sternberg. Leaving aside the economics of it for a second, Mary, the politics of this are also very complex. One side of it is that Jay Powell now has...

the tariff excuse if there is inflation, right? He now can say, look, this is what the president caused. We didn't. We had inflation going down, even now, be it slowly. We hadn't reached our target, but we were going there. But now, look, Trump imposed these tariffs, and they're the cause of whatever inflation shows up in the indexes for however long that happens.

And Trump then will say, well, wait a minute. It's not my fault. It's Fed's fault. You're not accommodating. You're not making up for the fact that this has an impact on the economy, particularly if the economy slows.

So it's your fault, Jay Powell. I mean, they're both kind of using tariffs to help make their political case. I think that Jay Powell is in a particularly difficult situation because of the dual mandate at the Federal Reserve. Let's remember that rather than just being assigned to deliver price stability to people who hold the dollar, he also has a mandate to keep unemployment low.

and to aim for the natural rate of unemployment. So the problem here, as I see it, is that if we go into a high tariff regime, everything costs more. The stock market goes down. So there's a wealth effect, not just on rich people, but on lots of middle class people who are looking at their 401ks and seeing them lose lots of what they've saved.

So I think consumers are going to start to pull in their horns and say, you know, we have to save more deer because we need to look out for our retirement. So you have less consumer spending and that's going to drive businesses to actually start to go into a more defensive crouch. And that could lead to recession, which would lead to job losses and it doesn't get better from there. So

Jay Powell has to, on the one hand, make sure that inflation doesn't raise its head again. But on the other hand, he has to worry about the health of the U.S. economy, which I think, whether we go into a recession or not, will certainly slow under a higher tariff regime. The portents now are that the economy is going into a slow period. I've seen

estimates of 1% or so GDP growth in the first quarter, which ended on March 30, and even in that or lower in the second and third quarters as the tariffs hit unfold. And as businesses, and this is a crucial point, delay capital investment because they're waiting to see what the outcome of the tariff regime will be. Where do you put a new plant?

You don't know. I mean, because you have to take into consideration, will the tariffs be 10% or will they be 46%, say, if you're going to invest in Vietnam supply chain? Those kinds of calculations are taking place all over the American economy by businesses. And many businesses are taking the sensible point of view that says, well, we'll just wait.

And when you wait, that tends to have a dampening effect on investment. And investment is crucial to future growth. But there is also, Joe, this issue of whether or not the Fed should see through the one-time increases that Mary talked about and say, well, it's just going to be one time. We're not getting a generalized increase in inflation or an increase in inflation expectations by the public. Or take the risk of

The economy is teetering into recession and we're going to cut rates and risk, therefore, some kind of higher inflation. Now, the historical analogy I want to mention is when Nixon took the U.S. off the dollar standard in 1971, collapsed the Bretton Woods post-war.

currency regime and monetary regime. And that set off a tremendous economic ructions around the world, including inflation. And Arthur Burns, the Fed chairman at the time for Nixon, he accommodated that. And we ended up producing what became a decade of inflation, the worst inflation episode until the recent one during the COVID era.

The Fed doesn't want to do that. It doesn't want to be Arthur Burns, Joe. Absolutely not. And, you know, it's worth pointing out that this has been a global dilemma because I think that central banks around the world really, especially since the 2008 financial panic, have always fretted about this issue of when should you

believe that inflation is a one-off thing, when do you need to worry that it is going to set in and become more permanent? And then you have to take rearguard action that becomes more damaging. And it's worth pointing out, again, in the political context of this Powell-Trump feud that is developing, Jerome Powell's judgment on this isn't impeccable.

Because he did make the mistake in 2021 where they thought that the inflation coming out of the pandemic was a one-off, the word was transitory, related to supply chain disruptions, and they were badly wrong about that.

And in fact, I think that that experience may well motivate them to not want to repeat that mistake twice and to be more predisposed this time to worry that the inflation is really going to bed in and become a more permanent phenomenon if they don't nip it in the bud as a result of the tariffs.

So, you know, in that sense, this is kind of a judgment call. Central bankers can't see the future any more than the rest of us can. But I think that the other thing that Trump probably should pay more attention to politically is that the other lesson of the past few years is that American voters, households, ordinary people have very, very limited patience for inflation. And so I think that voters would want

a central bank that is going to be much more hawkish on inflation than the Fed has been recently and than Trump wants Powell to be right now. That's part of the reason that Trump won the election. Right. Absolutely. There's no question about that. I think it was his best issue, to be honest, that and the border. All right. We are going to take another break. And when we come back, we'll talk about the chances that Donald Trump might fire Powell

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Welcome back. I'm Paul Gigo here on Potomac Watch, the daily podcast of the WSJ Opinion Pages. And I'm here with Joe Sternberg and Mary O'Grady. Let's turn to the future here, and that is the future of Jay Powell as chairman of the Fed and the Fed's independence, Mary. Because that word that Donald Trump used in his post, termination, cannot be soon enough. Termination implies terminating him as a Fed chief.

Powell's term, I think, ends in April of 2026, which is a full year from now.

Trump has talked privately about firing Jay Powell before that. He rages behind the scenes, I know in private, about the decision he made to appoint Powell as Fed chairman in his first term. He thinks he was betrayed. That is, Trump thinks he was betrayed by Steve Mnuchin, the Treasury Secretary at the time, who told him that he could control Powell. At least that's the conclusion he reached from conversations with Mnuchin. And of course, you don't control

Fed chairman, or it's hard to do. And Trump was raging in the first term against periods where Powell hadn't cut rates as Trump wanted him to. So there is this risk that Trump could try to fire Powell. Now, I don't think Powell will go, but what happens if Trump does that?

Well, I think, first of all, we should make it clear that presidents always want that chairman to lower interest rates and a real estate mogul president even more so than probably the others. But he would take a huge risk by trying to fire Powell. And I think mainly because

What he loses sight of, I think, is that the U.S. dollar is a fiat currency. The only thing that supports the U.S. dollar is faith in the U.S. dollar. So if you start to take the Fed chairman out because you want him to issue a more accommodating monetary policy, I think you erode a lot of confidence. I mean, the dollar has already been selling off since this tariff war began, but I think it would get much worse

If it looked like I mean, it not just looked like, but if it became apparent that Donald Trump was trying to run monetary policy from the White House. And of course, as Jay Powell has said, he's not going to go if the president tries this. So it's going to have to go before the court.

And there's going to be a fight about how much the president has the power to get rid of the chairman. And so you will also be dragged into a period of extended uncertainty about where Fed policy is going. So I think for all those reasons,

it would really be dangerous no matter how frustrated Donald Trump is. I mean, he might turn out to be right about easing a monetary policy, but because of the way the Fed operates, it can only make decisions based on the data it has and can't see into the future. So

Jay Powell, I think, is right to hold his fire until he sees the whites of the eyes of disinflation. And he hasn't seen it yet. So he's kind of stuck in that stance. And President Trump is going to continue to pressure him, I think, because if we do have an economic slowdown, it would take some pressure off the U.S. economy if the Fed funds rate was cut a little bit.

But I think it would be a disastrous outcome for the U.S. economy and for the dollar. Well, that dollar point is very important because, as you say, the dollar has been under pressure because of the tariffs. And typically, when you impose tariffs, the dollar goes up. But in this case, it has been going down, not every day, but not in the last few. But there was a period there where it really did sink.

And if you introduced new inflationary expectations from the market thinking, okay, Powell is in trouble. We don't know what's going to happen. It could really hurt the dollar, Joe. And then you also have the legal fight. Powell would, I think,

sue to keep his job. It isn't clear that the president has the authority to fire Powell. It's supposed to be an independent agency. But there is the theory of the unified executive that, in fact, Powell can be fired. The president would test that theory. Powell would fight it. It would go through the lower courts and I think go up to the Supreme Court in fairly rapid fashion. But how fast? It's hard to say. Several months, I would think, two, three, four months,

maybe. And during all that time, you'd have everybody wondering what the hell is going to happen. And that would be the kind of uncertainty that would hurt the economy. Yes. To paraphrase a famous dead economist, markets can stay in turmoil longer than it takes for you to adjudicate something.

an issue. I think that that kind of uncertainty is exactly the thing that Trump should not want to be courting right now. You know, if you want to have an argument about the governance of the Fed or what role a Fed chairman should play or how much authority they should have or what oversight they should have,

All for that. I've written about that issue before. I think it's a healthy discussion to have. It is not a good discussion to have on the fly under the gun of upset financial markets and global investors, you know, in a fit of pique over what is basically a bad economic policy from the White House.

The whole premise of this Trump argument is that what the U.S. economy needs right now is lower interest rates. No, I mean, what the U.S. economy needs right now is tax reform, which is currently sort of moving through Capitol Hill in a fitful fashion. And Trump could try to use his bully pulpit to accelerate that. The U.S. economy needs deregulation, which Trump is starting to maybe have some success with.

And then it doesn't need all of these erratic willy-nilly tariff wars, which is something where Trump is really falling down at the moment. So the irony of the situation is that Trump has all of the tools that he needs to deal with the problems that

he's complaining about here without having to vey against Jerome Powell all the time. If Trump just starts reversing some of his own policy mistakes and allowing the U.S. economy to grow as it otherwise would. Can I just add to what Joe said?

I think that the Fed chairman could also be helped out if the executive in Congress would do something about the size of the deficit and the debt, because that run up of federal spending also put a lot of inflationary pressure into the U.S. economy. And just one last point. If you remove Powell, you have to put somebody in there. Can you imagine the person that he puts in as the Fed president being viewed by the market in any way as independent?

I mean, the market is immediately going to think of him as a sock puppet for Donald Trump. And that can't have a good outcome. Kind of the point you guys are all making, and I very much agree with, is that monetary policy cannot make up for other economic policy mistakes. If you get tax policy wrong, if you get regulatory policy burdens too high, if you get trade policy wrong,

You can't expect the Fed to come in and say, all right, we're going to save the day with easy money because there are consequences to that. Now, to your point, Mary, about putting somebody else in, the alternative that people have floated, and I know it's been discussed inside the administration as well, okay, well, don't fire Jerome Powell as Fed chairman, but Trump would name essentially a shadow chairman for the Fed, somebody who

This will be my Fed chairman come the time that I have to make a nomination. And that could happen in November, December, or January or something like that in anticipation of starting after Powell's term ends in the spring next year.

I'll name somebody and that person will then be able to kind of lay out what a proper Fed policy would be. I would not want to be that person in that position because the markets would be thinking you're taking dictation from Donald Trump, even if that person were strong and was not doing that. You don't want that job, Paul. Let me put it that way. Well, I'm Senate non-confirmable, Mary, so I'm not going to get it.

I don't see how Donald Trump gains in that scenario because he's taking a big gamble that whoever he names is going to be able to see into the future better than Jerome Powell is. I mean, he seems to kind of think that Jerome Powell is doing this to somehow harm Donald Trump, you know, that he won't.

do what I say because I have a political vendetta against him. Basically, Powell and all these economists he has around him are taking all the data that they can find to try to project what is going to happen six months from now. That's a very tough assignment, and it's not going to be any easier for Donald Trump's pick if he creates that conversation.

that job. I mean, I just want to point out you already have that job because we feature that kind of debate on our pages on a weekly basis. Unfortunately, I have no power to implement it, which means I escape blame other than for my intellectual errors, but no policy blame.

But I think Mary's right. It is a very hard job that the next Fed chairman is going to have, and Powell has right now, because tariffs make his life more difficult and his decision-making more difficult because he had burdens to the economy that weren't there before the tariffs were applied. And that's even if you believe that the tariffs, as the president says, are going to lead to a new great era of manufacturing.

and capital flows into the United States, that's not going to be something that happens right away. And Powell has to navigate the next six, nine months, which are going to be particularly difficult given the tariffs and where the economy is right now. So thank you, Mary. Thank you, Joe. We'll leave it at that. There's going to be a lot more to this story in the coming months because Donald Trump, I suspect, is not going to let up on Jerome Powell and the Federal Reserve. And

And we'll see where this goes. So thank you all. And thank you all for listening. We're here every day on Potomac Watch. So please join us again tomorrow.

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