The president wants interest rates cut, but his trade war has the Fed chair boxed in

ILLUSTRATION: RACHEL MENDELSON/WSJ, KEVIN DIETSCH/GETTY, BRANDON BELL/GETTY, JONATHAN ERNST/REUTERS

President Trump is threatening to fire Federal Reserve Chair Jerome Powell unless he cuts interest rates to cushion the blow from his tariffs.

The problem is twofold. It isn’t clear the president has the legal authority to dismiss Powell before his term ends next year. And Trump’s trade war has made rate cuts more difficult for now because the Fed fears acting to shore up the economy could worsen inflation.

That tension has left the two men on a collision course without any easy escape—unless Trump backs down on tariffs or until the economy shows signs it is crumpling under the weight of the import duties.

“It is the most complex hand any Fed chair has been dealt,” said Patrick McHenry, a Republican congressman from 2005 until January who chaired the House Financial Services Committee for the last two years.

The trade war threatens to touch off a contentious showdown between the White House and the Fed that threatens an unprecedented legal standoff or a rollback of the institution’s longstanding autonomy to set interest rates as it deems fit.

During the president’s first term, Trump badgered Powell to lower interest rates but never followed through on threats to sack the man he installed to lead the central bank in 2018.

A display shows ‘Times Trump Criticized the Federal Reserve’ during a House Financial Services Committee hearing in 2020.

In part, that was because the Fed ultimately moved interest rates in the direction Trump wanted—down—though often not fast or large enough for the president’s liking. Powell also made clear that he would not leave his position if asked because he doesn’t believe the law allows him to be dismissed over a policy dispute.

The second term is turning out to be different. Across his administration, Trump has sought to install loyalists in key positions whose credentials have been challenged by mainstream experts.

The White House is also displaying a greater willingness to challenge legal and institutional precedents, including key protections around the independence of the Fed. The Justice Department is seeking to overturn a 90-year legal doctrine that has protected regulatory appointees, including at the Fed, from being sacked over a policy dispute.

Tensions boiled over this week after Powell on Wednesday dryly observed how the central bank would face difficult trade-offs managing the fallout from a trade war.

Trump blasted Powell in a social-media post on Thursday, saying the end of his term “cannot come fast enough.” Later, he told reporters, “If I want him out, he’ll be out of there real fast, believe me.”

Trump, recognizing the potential for short-term pain from his tariffs, is looking for the Fed to come to his rescue now. Powell, aware that the Fed may need to soften the blow from the trade war if a recession unfolds, isn’t willing to move pre-emptively, as that could make inflation worse.

“Trump seems to want all the significant sources of authority in this world to bend to his whims: courts, elite universities, foreigners—both friend and foe. It strikes me as quite unlikely that the Fed will ultimately escape this,” said Jon Faust, who served as a senior adviser to Powell from 2018 until last year. The risk of a crisis over the Fed’s authority “is uncomfortably high,” he said.

“I don’t pretend to know the form or how the battle will play out, but I don’t see the institution rolling over,” said Faust, a fellow at the Center for Financial Economics at Johns Hopkins University.

Many constitutional scholars believe it would be difficult to remove the Fed chair, but the issue isn’t settled legally. Powell has consistently said that he doesn’t believe he can be removed from office over a policy dispute. “Our independence is a matter of law,” he said Wednesday.

If Trump follows through on threats to remove Powell, the Fed chair is likely to personally finance a legal challenge, according to people who have spoken to the Fed chief. Such a battle would likely fall to the Supreme Court to sort out.

Federal Reserve Chair Jerome Powell.

Even if a near-term collision is avoided, Trump will still have the opportunity to put his stamp on the institution by naming his successor next year.

On the economy, Trump has imposed unilaterally much larger and broader tariffs than in his first term in ways that threaten to send up prices in the short run. That is a concern for the Fed because inflation has been running above its 2% goal rather than below, as was the case in the first term.

Setting interest rates to cushion the economy from a so-called supply shock that limits the ability of the economy to produce goods and services is a particularly challenging situation for central banks. A trade war could initially send up prices while also weakening demand, hitting the labor market.

Until it is clear whether inflation or unemployment is the bigger problem, anything the Fed does with interest rates to restrain inflationary pressures could worsen unemployment, and vice versa.

President Trump signs an executive order in the Rose Garden at the White House earlier this month.

The president’s April 2 tariff announcement unleashed significant market volatility that prompted some corners of Wall Street last week to grimly wonder if the Fed might have to intervene to support dysfunctional Treasury bond markets. Those worst-case scenarios were avoided after successful Treasury auctions together with Trump’s decision, announced on April 9, to suspend many of the largest tariff hikes for 90 days.

The episode highlighted one of several potential avenues for a collision between the Fed and the White House. “There are too many ways for tensions to arise,” said Faust. If inflation or unemployment deteriorate as a result of tariffs, “there’s not going to be a quick fix, where unlike the tariff snafu, Trump can backtrack on some damaging policy.”

Even for members of the president’s party, attempting to remove Powell before his term ends is seen as a nuclear option that would accomplish little of what the president wants while creating enormous downside risk. “It’s destabilizing at a rather unstable time,” said McHenry.

By provoking a legal standoff with the Fed, the president wouldn’t only risk harmful market instability, but he would set back his legislative agenda on Capitol Hill and create an unreasonable degree of scrutiny for even “normative picks” to the central bank’s board, said McHenry. “The juice is not worth the squeeze,” he said.

Rep. Frank Lucas (R., Okla.) said Thursday the Fed was composed of a “very intense group of ultrabright, strong willed individuals,” and he said a monetary policy task force he has been tasked to oversee could ultimately consider measures to strengthen the Fed’s independence.

“That independence is important,” said Lucas. “I would respectfully note that the debate over who should be in control of the Fed was already fought” when Congress created the institution.