Uncertainty Ahead as Trump–Powell Relationship in Wall Street Spotlight

Wall Street is keeping a close eye on the fractured relationship between Federal Reserve Chair Jerome Powell and President-elect Donald Trump ahead of the central bank chief term expiring in two years.
At the post-election policy meeting press conference on Thursday, reporters questioned Powell about his future at the central bank now that Trump has secured a second term.
While the Fed chief refrained from commenting—directly or indirectly—about the presidential election results, he clarified that he would not resign and instead fill the remainder of his term, which expires in 2026.
Powell later added that the president does not possess the power to fire or demote the Fed chair.
Wall Street will closely monitor Trump and Powell’s relationship.
In November 2017, Trump nominated Powell to head the Federal Reserve, saying that “he’s strong, he’s committed, and he’s smart.”
Trump has confirmed that he will not terminate Powell from his position, telling Bloomberg this summer that he would allow the Fed Chair to serve out the remainder of his term, “especially if I thought he was doing the right thing.”
In recent months, Trump has suggested that presidents should have at least a voice in the Federal Reserve’s monetary policy decisions.
“I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman,” Trump told reporters at his Mar-a-Lago residence in August.
“I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether the interest rates should go up or down,” Trump said.
After Fed officials cut interest rates for the first time in more than four years in September, Trump questioned the action during a campaign stop at a Bitcoin bar in New York City.
“The economy would be very bad, or they’re playing politics, one or the other. But it was a big cut.”
Powell and his colleagues have noted on multiple occasions that the Federal Reserve is an independent agency, free of political intervention.
The central bank maintains a dual mandate of maximum employment and price stability, though the institution has expanded its purview over the years, such as banking regulation.
Additionally, there has been discussion as to whether the Fed should incorporate climate change into decision-making process.
Powell restated to reporters during the recent post-Federal Open Market Committee meeting that the Fed crafts policy based on what is best for the American people and the economy rather than presidents and Washington lawmakers.
He did, however, note that the near-term effects of the election results will have little impact on the Fed’s outlook.
At the same time, policies implemented by administrations or Congress could produce economic effects over time that might influence the central bank’s dual mandate.
“So, along with countless other factors, forecasts of those economic effects would be included in our models of the economy and would be taken into account through that channel,” Powell stated.
At the onset of the coronavirus pandemic, the Federal Reserve slashed interest rates to nearly zero, engaged in a buying spree of Treasury securities, mortgage-backed securities and corporate bonds, and expanded the money supply by more than $6 trillion in a roughly two-year span.
The objective was to cushion the economic blows of the public health crisis.
After the Fed shrugged off potential inflationary effects, referring to price pressures as “transitory,” the monetary authorities launched a quantitative tightening cycle in March 2022—a blend of raising interest rates and trimming its $8 trillion balance sheet—to support the other side of its dual mandate: price stability.
In September, the Fed started to loosen its restrictive policy stance by igniting a super-sized half-point rate cut.
It followed up with a quarter-point reduction to the benchmark federal funds rate at the November policy meeting.
“I’m not happy with the Fed because I think they’re following not leading, and we should be leading,” Trump said.
“I have the right to remove him. No, I’m not doing that,“ he added. ”I also have the right to put him in a regular position and put someone else in charge, and I haven’t made any decisions on that.”
Experts have questioned if Trump can legally remove Powell from his position.
Powell holds three jobs: chair of the rate-setting FOMC, a member of the Board of Governors, and chair of the Board of Governors.
Statutes surrounding this issue are unclear, with Conti-Brown concluding: “But we just don’t know: it’s legally uncertain.”
The last time there was such a fractured relationship between the White House and the Federal Reserve was in 1965.
Then-Fed Chair William McChesney Martin Jr. was convinced the economy was overheating and facing inflation, in part because of the administration’s policies, forcing the entity to raise rates.
President Lyndon Baines John was enraged by this decision, worried that a rising-rate climate would harm his economic agenda.
“You took advantage of me and I just want you to know that’s a despicable thing to do.”
“I’ve never implied that I’m right and you’re wrong,” Martin responded. “But I do have a very strong conviction that the Federal Reserve Act placed the responsibility for interest rates with the Federal Reserve Board.
“This is one of those few occasions where the Federal Reserve Board decision has to be final.”
The administration relented and determined that it lacked the authority to fire Martin. That said, his rate hikes failed to stop the inflation bomb that went off in the following years.
Unlike Johnson, Trump successfully convinced Powell to lower interest rates, following through with three 25-basis-point rate cuts in 2019.
Looking ahead to January 2025, the Fed will have “no choice but to dance to Trump’s tune, whether it likes it or not,” says Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, in a note.