If Trump tries to fire Powell, Fed Chair is ready for a legal fight

Powell told then-Treasury Secretary Steven Mnuchin that he would fight his removal if sought by the president, according to people familiar with the matter. Trump was upset the Fed was raising interest rates against his wishes.

For Powell, the unsavory prospect of a legal showdown—one he might have to pay for out of his own pocket—was imperative to preserve the ability of future Fed chairs to serve without the threat of being removed over a policy dispute.

Six years later, Trump is heading back to the White House and the dormant drama of his fraught relationship with Powell is back on display. When asked last week whether he would resign if asked to do so, Powell offered a one-word reply: “No." He gave the same answer when asked if the president had the authority to dismiss him.

Powell, a former private-equity executive who has a law degree, was later pressed to explain his rationale. He delivered another curt response: “Not permitted under the law."

His unflinching rejoinders laid bare the prospect that any attempt to force Powell to leave before his term ends in 2026 would likely be resolved in an unprecedented legal battle—the same one Fed leaders had prepared for years ago.

“If the president were to succeed at this, that would mean every future chair is subject to removal at the whim of the president," said Scott Alvarez, who served as the Fed’s general counsel from 2004 to 2017. “I don’t think that’s a precedent Jay would want to set, and that’s why I think he would fight it. This is a humongous precedent."

To be sure, Powell and other senior Fed officials have taken pains to avoid saying anything provocative about Trump or the election. In keeping with his no-drama, low-profile approach, Powell hasn’t sought to publicly raise the issue of his job status. It resurfaced as an issue last week only in response to repeated hypothetical questions.

And Trump hasn’t indicated any time recently that he plans to seek Powell’s ouster. “I would let him serve it out, especially if I thought he was doing the right thing," Trump told Bloomberg News in a June interview.

People who have advised Trump on the issue don’t themselves agree over how far the president should go. Those with experience in markets have counseled against replacing Powell. Scott Bessent, an investment manager who is currently an adviser to Trump, last month suggested Trump should announce whom he plans to select as Powell’s successor so that this “shadow" chair could try to undercut Powell, making him a lame duck. In an interview last week, Bessent said based on recent criticism of the idea, he no longer thought it was worth pursuing.

Other advisers are spoiling for a fight and seeking ways to challenge Powell more directly. They think the central bank and its backers in Washington and on Wall Street have made a fetish of the Fed’s independence to a degree that isn’t supported by constitutional law and isn’t good for the economy.

Hours after Powell implied last week he would fight any dismissal, Sen. Mike Lee (R., Utah) posted a news article with a comment suggesting the Fed should answer to the White House. “Yet another reason why we should #EndTheFed," he wrote on X.

In a second term as president, Trump faces changed circumstances in his relationship with the Fed in two important ways. First, Trump has less of an immediate opportunity to put his stamp on the institution as a whole. In his first term as president, he was able to fill five vacancies on the seven-person board within his first year in office. Now, there are no vacancies on the Fed’s board, and only one seat is set to open up in the next two years.

Second, trying to remove the Fed chair now, when the central bank hasn’t finished waging its battle on inflation, would be more disruptive to markets than during his first term, when inflation was predictably low. Both short-term interest rates, which are set by the Fed, and long-term rates, which are driven by broader forces, are much higher than they were during Trump’s first term.

Trump has repeatedly promised to bring down inflation and interest rates. “Inflation, remember, it is a country buster," Trump said in May when asked about high borrowing costs. “And we can’t take that chance."

Still, heightened inflation volatility could increase the prospect of a clash between the Fed and the Trump White House if new policies stoke concern inside the central bank around inflation. For example, if deficit-financed tax cuts or a new round of tariffs lead investors to expect higher inflation, the Fed might hold interest rates higher than would otherwise be the case.

Trump also inherits a dicier fiscal backdrop, with the Treasury set to roll over trillions of dollars in debt in the coming years that it borrowed at much lower interest rates. “There is an ultimate governor here on what Trump can do with the Fed, which is the market," said Mark Spindel, an investment manager who co-wrote a history of Fed independence.

If Trump attempts to unseat Powell, markets would react “very poorly," said Michael Feroli, chief U.S. economist at JPMorgan Chase. Some analysts believe a run-up in bond yields in recent weeks reflects expectations of deficit-fueled economic growth in a second Trump term. “If that interacts with uncertainty over who is going to run the Fed, you could get something very problematic," he said.

The Fed has guarded its independence to set monetary policy ever since the very high inflation of the 1970s. President Richard Nixon privately pressured his Fed chairman and former adviser, Arthur Burns, to ease policy ahead of the 1972 election, according to Oval Office recordings. Burns acceded.

After years of high inflation were cured by a punishing recession in the early 1980s, the Fed and other central banks around the world sought and were granted considerable operational autonomy, or “independence," by their governments to set interest rates with an eye toward the long-run good of the economy. Central bank independence also insulates politicians from taking the blame for unpopular steps to corral inflation.

President Barack Obama put Powell on the Fed’s board in 2012, and Trump named Powell to lead the Fed in 2018. President Biden reappointed him to a four-year term in 2022, and 80 senators voted to approve his confirmation. His current term as chair runs until May 2026. He has a separate 14-year term on the board, which ends in early 2028.

Trump has said at times that he has the authority to dismiss Powell, but he also has acknowledged that the law isn’t clear about this. “I was threatening to terminate him," Trump said last month at the Economic Club of Chicago, in reference to his first term. “There was a question as to whether or not you could."

In Trump’s first term, after his advisers told him that he couldn’t fire Powell, Trump said to Powell during a phone call, “I guess I’m stuck with you." Months later, Trump floated the idea of demoting Powell as chair and nominating another Fed governor to serve as chair.

In some ways, Powell’s comments last week were unremarkable because he said the same things five years ago. “If you got a call from the president today or tomorrow, and he said, ‘I’m firing you, pack up, it’s time to go,’ what would you do?" one lawmaker asked Powell during testimony in 2019. “Well, of course I would not do that," Powell responded. “My answer would be no."

He maintained the same view in private, out of duty to the institution and his successors. “I will never, ever, ever leave this job voluntarily until my term ends under any circumstances. None whatsoever," he told a visitor that year. “It doesn’t occur to me in the slightest that there would be any situation in which I would not complete my term, other than dying."

At the time, Fed leaders decided that if Powell’s status as chair of the Fed’s board was called into question, the central bank’s separate interest-rate setting body, the Federal Open Market Committee, would close ranks by meeting to immediately re-elect Powell as its chair.

The FOMC is composed of the Fed’s seven Washington-based governors and a rotating group of presidents from the 12 Fed banks, which are quasi-private institutions. The Fed’s regional bank presidents are appointed not by the president but by the bank’s directors, who are generally local business or nonprofit executives. The FOMC elects its own chair at its first meeting of the year.

The upshot is that attempting to remove Powell would provide little practical benefit because Powell would likely continue to lead the institution until any litigation is resolved, which could extend beyond Powell’s term.

Alvarez, the Fed’s former general counsel, said he thinks Powell would win a legal challenge on the matter, in part because lawmakers who drafted and amended the law that created the Fed repeatedly debated and decided against including provisions that would allow the chair to be removed at will by the president.

The Fed’s seven governors are appointed by the president to 14-year terms. They must be confirmed by the Senate. The law says they can only be removed for cause, which courts have interpreted to mean malfeasance or dereliction of duty.

A separate law allows the president to designate one of the seven governors as Fed chair for a four-year term, also subject to Senate confirmation. The law is silent on whether the same dismissal standard applies.

“The argument that Jay Powell cannot be demoted before the end of his four-year term is pretty darn strong," said Alvarez. Moreover, Supreme Court Justices Brett Kavanaugh and Samuel Alito have, in separate opinions over the past decade, indicated they regard the central bank as unique among federal regulatory agencies.

Any legal battle would likely need to be paid for by Powell because it isn’t clear whether the Fed itself would have standing to challenge his removal.

Managing presidential opinions has long been part of the Fed leader’s job, but one conducted mostly in private. President Lyndon B. Johnson once asked if he could fire Fed Chairman William McChesney Martin over a policy disagreement. His lawyers said no. Instead, he summoned Martin to his Texas ranch to berate him for raising interest rates, saying it was despicable, in Martin’s account. Johnson nevertheless concealed the dispute from the public. “Your job is to provoke a fight. Mine is to prevent one," Johnson told reporters while seated on his porch with Martin after the lashing.

Powell has said his broader goal is to preserve a Fed that transcends divisive politics by focusing on rigorous, evidence-based analysis. “I feel accountable and responsible for the institution," he said in March.

This spring, Powell dismissed concerns about potential challenges to the Fed’s independence, including after The Wall Street Journal reported that allies of Trump were drafting ideas to blunt the central bank’s autonomy. When asked about the issue in May, Powell pointed to strong support on Capitol Hill for an independent Fed. “So I’m less worried about that than the sort of things that have been in the press lately may suggest," he said.

During Trump’s first term, Senate Republicans often acted to safeguard the Fed’s autonomy, thwarting attempts to confirm several candidates they deemed unqualified. Some Republican lawmakers who sit on the committee that oversees the Fed said this spring they would be concerned if Trump tried to make changes to the Fed’s autonomy. “I have to think about the Fed for the next 50 years, not the next four, and independence is important," Sen. Thom Tillis (R., N.C.) said earlier this year.

Spindel, the investment manager, wondered if Fed independence would get the same defense from senators in a second Trump term. “Part of Trump 2.0 is going to be figuring out where executive authority stops," he said.

Write to Nick Timiraos at Nick.Timiraos@wsj.com