On Tuesday, President Donald Trump eased his recent threats regarding the dismissal of Federal Reserve Chair Jerome Powell, following a series of critical comments aimed at Powell for not lowering interest rates.
“I have no plans to fire him,” Trump told reporters in the Oval Office. “I would like to see him take a more proactive approach regarding his thoughts on reducing interest rates,” he added. This shift in tone was positively received by Wall Street, with equity index futures climbing nearly 2 percent as trading resumed Tuesday evening.
On Monday, stocks, bonds, and the US dollar had declined after Trump had vocally criticized Powell for not further reducing interest rates since he took office in January.
“Whether this change reflects the market’s negative reaction on Monday to the prospect of firing Powell or was part of a deliberate strategy, it’s certainly a positive development,” commented Krishna Guha, Vice Chairman of Evercore ISI. “It significantly lowers the risks of severe economic outcomes, including stagflation and the potential transformation of the tariff crisis into a sovereign debt crisis, although these concerns persist.”
During the same Q&A session, Trump expressed hope that a trade agreement with China could lead to “significantly” reduced tariffs, which also sparked interest among investors.
He indicated that a trade deal would likely result in “substantially” lower tariffs on Chinese imports, suggesting that any final agreement would not align with current tariff levels, though “it won’t be zero,” he added.
The tumultuous implementation of Trump’s tariffs, alongside his recent criticisms of Powell and the Federal Reserve, had unsettled investors and prompted a sell-off of US assets, such as stocks, government bonds, and the dollar.
Trump often accompanied his sharp critiques with threatening comments, including a social media post asserting that Powell’s removal from the Fed should “come quick,” alongside derogatory comments labeling Powell “a major loser.” Such remarks unsettled investors, who regard the Fed’s independence as crucial for maintaining its credibility as the leading central bank worldwide and for overall financial stability.
While Trump appears to have momentarily set aside these threats, his criticism of the Fed’s interest rate strategy remains unwavering.
“We believe it’s the perfect moment to lower rates, and we would like to see our chairman act promptly rather than tardily,” Trump stated.
Trump’s frustrations with Powell trace back to his previous term, during which he appointed Powell as the head of the Fed but soon grew agitated by the rate hikes under Powell’s leadership.
Though Trump has contemplated dismissing Powell, he was ultimately persuaded against it by his advisors. Questions about whether he possesses the authority to do so remain, as Powell maintains that the Federal Reserve Act, established in 1913, does not permit such removal. Meanwhile, Trump has asserted that should he wish to remove Powell, it would happen “very quickly.”
The law indicates that the seven Fed governors, nominated by the president and confirmed by the Senate for staggered 14-year terms, can only be dismissed for “cause,” commonly interpreted as misconduct rather than policy disagreements. However, the legislation does not clearly outline limitations regarding the removal of the Fed chair, who is among the seven governors.
As Trump’s confrontational language coincides with legal challenges concerning his dismissal of officials from other independent federal agencies, these developments are being closely monitored by those in Fed circles to assess whether Trump has the authority to dismiss Fed officials who have long been expected to execute monetary policy free from political influence. Last year, the Fed cut interest rates by a full percentage point to the current range of 4.25 percent to 4.50 percent but has not made any changes during the two policy meetings since Trump’s return to the presidency. The next meeting to determine rates is scheduled for two weeks from now.
Fed officials are increasingly worried that the aggressive tariffs implemented by Trump since early February may reignite inflation, making it harder for the Fed to reach its 2 percent target. Simultaneously, there are concerns that these tariffs could slow economic growth and increase unemployment while also contributing to rising inflation.
As a result, policymakers are adopting a cautious approach towards additional rate cuts, though most still anticipate some reductions could occur later this year.
Following Trump’s comments, interest rate futures traders adjusted their expectations for Fed policy shifts, now forecasting three quarter-point cuts by the year’s end, down from four previously thought to be likely. Current economic indicators, such as employment and retail sales, show resilience, but surveys of consumer and business sentiment reveal a rapid decline in confidence. Most economists now view the risks as skewed toward the downside as the impact of tariffs begins to accumulate.
The International Monetary Fund downgraded its projections for both US and global economic growth this year, primarily attributing this revision to Trump’s tariffs.