United States President Donald Trump and members of his cabinet have intensified attacks against Federal Reserve chairman Jerome Powell in recent weeks in what many see as an effort to force Powell to resign, with some reports suggesting Trump may even outright fire the central bank chief. It’s a campaign that flies in the face of what has been one of the hallmarks of U.S. economic management: the independence of the central bank from direct political interference or pressure. Here, the Financial Post breaks down the latest developments in the clash and what it could mean for markets and the global economy.

Why has Trump turned on Powell?

Since appointing Jerome Powell as chairman of the Federal Reserve in 2018, Trump has never been shy about his disapproval of the central banker’s performance.

Not even a year into Powell’s tenure, Trump said he was “not even a little bit happy” with the job Powell was doing. At the time, the Fed had raised

interest rates

as the

U.S. economy

picked up.

Powell was appointed again for another four-year term by former U.S. President Joe Biden in 2021. Trump has renewed his criticism in his own second term, complaining that the central bank should be lowering interest rates.

Among the negative comments, Trump has resorting to calling Powell names, everything from a “knucklehead” to “a stupid person” to “low IQ.”

This week, the White House intensified its attack, zeroing in on a renovation project at the Fed headquarters which has ballooned in cost to $2.5 billion, accusing Powell of mismanaging the project.

Most believe the White House is mounting the campaign in a bid to force the central banker to resign or to create a pretext to fire him.

In a post on X earlier this week, White House Deputy Chief of Staff James Blair posted a picture of Powell dressed up as Marie Antoinette with the caption, “Let them eat basis points.”

According to U.S. reports, Trump held a meeting with Republican lawmakers on Tuesday, floating the idea of dismissing Powell.

But on Wednesday, Trump told reporters in the Oval Office that it’s “highly unlikely” he would fire Powell, unless “he has to leave for fraud.”

“He’s always been too late, hence his nickname, ‘Too late,’” he said. “He should have cut interest rates a long time ago.”

Over the course of the last several months, Powell has continued to defend the independence of the U.S. central bank.

“As a practice, I never comment on what the president says, but I think people can be confident that we will continue to keep our heads down, do our work, and make our decisions based on what’s happening in the economy, the outlook and the balance of risks,” said Powell, during committee testimony last month.

Can Trump really fire the federal reserve chair?

Trump is not the first president to criticize monetary policy and the decisions made by the Fed, but he is the first to openly consider firing its head.

The U.S. Supreme Court set a precedent in a 1935 case titled Humphrey’s Executor v. U.S, which put limits on the ability of U.S. presidents to fire heads of independent agencies.

Earlier this year, Trump fired Democratic-appointed Gwynne A. Wilcox at the U.S. National Labor Relations Board and Cathy Harris from the Merit Systems Protection Board. Wilcox and Harris have legally challenged their firings in court, with case going all the way to the U.S. Supreme Court.

Wilcox and Harris have contended their case has broader implications for the independence of the Fed. But in May, the nine justices reaffirmed the distinct position of the U.S. central bank.

“We disagree,” the May 22 decision read. “The Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.”

The court added that the Fed chair could only be fired if there is “cause.”

Setting aside the legalities, firing Powell could have broad implications for the global economy, the independence of the central bank, and the bond market.

“What matters more to bond markets is the direction of travel when it comes to Fed independence, especially in the context of the U.S.’ ultra-loose fiscal policy and growing concerns about fiscal dominance,” said analysts from Capital Economics, in a note.

“Unlike raising

tariffs

, which can be withdrawn before the real damage is done, the reputational costs from firing Powell would be harder to undo,” the note added.

How are the markets reacting?

After reports surfaced that Trump was considering outright firing Powell, markets at first reacted negatively.

The U.S. dollar Index decreased by one per cent and equities dropped sharply. Meanwhile, two-year bond yields dropped by 10 basis points on the expectation of lower near-term interest rates, while the 30-year yield increased by 10 basis points.

“Markets caught their breath after this initial shock, but investors remain skeptical about what comes next,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, in a note

Markets regained most of their losses Wednesday, with the S&P 500 still managing to close with gains.

Ozkardeskaya said the consequences of an attack on the Fed’s independence could be dramatic, noting the loss of credibility would have serious implications for the Fed’s ability to conduct monetary policy.

“Not only would the U.S. dollar and Treasuries tumble, but the Fed would lose a superpower: the one that helps it support turmoiled financial markets by buying billions of dollars in U.S. debt,” she said.

Analysts at

Deutsche Bank said given the current context of higher tariffs, the removal of Powell would create an even bigger inflationary risk. 

“Taking a step back, central bank independence is a critical pillar for the achievement of price stability,” they said

, in a note.

Why hasn’t Powell lowered rates?

The Fed has elected to keep its benchmark interest rate unchanged at 4.25-4.5 per cent since January.

Powell has said Trump’s trade war, which started earlier this year, has caused uncertainty for businesses and the outlook for the U.S. economy, but it’s the inflationary potential that has the Fed worried.

Powell said during committee testimony last month that the reason the Fed has held rates is because the forecasts “do expect a meaningful increase in

inflation

over the course of this year.” The White House has denied tariffs are costly to American consumers.

U.S. inflation numbers for June also showed tariffs starting to have an impact on U.S. consumer prices, which rose 2.7 per cent year-over-year for the month, up from 2.4 per cent in May.

Analysts do not expect the Fed to cut this month, but remain divided on what will happen at its September decision.

Who is in the running to replace Powell?

Even if Trump decides not to fire Powell, his term as chair will be up in May 2026.

Some contenders who have been floated as successors include Kevin Hassett, who currently serves as director of Trump’s National Economic Council and who is seen as a Trump loyalist.

Another name that has been floated is Kevin Warsh, who served as a member of the Federal Reserve Board of Governors from 2006 to 2011.

Speaking to CNBC on Thursday, Warsh said the Fed needs a “regime change” and called for coordination between the central bank and the U.S. Treasury.

While Powell’s term is up as Chair in May, his term on the Federal Reserve Board of Governors will last until 2028.

Earlier this week, U.S. Treasury Secretary Scott Bessent said Powell should resign from his post on the board of governors as well.

Analysts have noted that even if Powell is removed, putting in a chair who is more in line with Trump’s vision of the Fed would not necessarily give the results the White House desires.

“A new Fed Chair will not give Trump carte blanche over policy,” said analysts at Capital Economics. “The Fed Chair is only one of 12 FOMC voting members.”

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Still, they noted, at a time when the FOMC is evenly split on when the Fed should start cutting interest rates; the additional influence could be helpful.

• Email: jgowling@postmedia.com