If Trump Dismisses Powell.. How Will Interest Rates Be Affected?

SadaNews - The ongoing pressure from Donald Trump on Jerome Powell once again confuses the markets and raises questions about what might happen next if the president dismisses the embattled Federal Reserve Chair.

Such a move would be the first of its kind in U.S. history and would almost certainly trigger a high-profile lawsuit that would draw attention from Washington and Wall Street, ultimately to be decided by the U.S. Supreme Court.

The latest turmoil erupted on July 16 amid reports that Trump is expected to take action against Powell soon, who has always been under the president's microscope for ignoring calls to lower interest rates. Trump responded to these reports stating that Powell's dismissal is "extremely unlikely unless he had to leave due to fraud."

Trump was referring to cost overruns associated with the renovation of the Fed’s headquarters, which the president and his allies have highlighted as a possible justification for dismissing Powell "for good cause." Article 10 of the Federal Reserve Act, the law governing the central bank's operations, states that members of the Fed's Board of Governors, including the chair, may be "removed for good cause."

The court is still grappling for the first time with whether cost overruns represent a sufficient justification for dismissal.

What is expected to happen next if Trump dismisses Powell?

The dismissal would take effect immediately, but Powell could immediately file a lawsuit, likely in federal court in Washington, seeking a court order to reinstate him while the legal proceedings move forward. Both sides would submit legal briefs outlining their arguments, giving Powell the opportunity to portray his dismissal as unjustified. A judge may hold a hearing before issuing a ruling on the court order.

The ruling may hinge on Powell's success in convincing the judge that he— and the "Fed"— would face "irreparable harm" during the case if the status quo is not maintained.

The ruling on the court order will be crucial as the judge could take months or longer before issuing a ruling on the substance of the case. If Powell's request for a court order is denied, his dismissal will stand, and the Vice Chair of the Fed will assume the role of chair. Currently, this position is held by Philip Jefferson, who was nominated by former President Joe Biden to the Fed Board in 2022. Powell was nominated by Trump to lead the board in 2017 during his first term.

If Powell is granted the court order, he would be able to remain in his position while the case proceeds. Either party could appeal, meaning a federal appeals court would look into the matter, potentially followed by the U.S. Supreme Court.

What is the likely decision of the U.S. Supreme Court if the case is brought before it?

The U.S. Supreme Court indicated in May that Trump cannot simply dismiss Powell without cause. While the court allowed Trump to dismiss officials from two other agencies without needing to provide justifications, the majority in the court asserted that this does not mean that the president has similar authority over the Federal Reserve. The court described the central bank as a "quasi-private entity with a unique structure."

Nonetheless, the court left open the possibility for Powell's dismissal for good cause. Trump's track record before the Supreme Court likely gives him a strong position if the case reaches that level. The conservative majority on the court has repeatedly declined to question Trump's decisions and granted him broad criminal immunity last year, then this year responded to a series of his requests allowing policies to go into effect that faced legal challenges.

"They are stepping aside and paving the way for Trump," said Jed Shugerman, a law professor at Boston University specializing in presidential powers.

Even if lower or high court judges were to conclude that Trump dismissed Powell unlawfully, it remains unclear whether he would be able to remain in his position, according to Jonathan Schaub, an expert in executive power at the J. David Rosenberg College of Law at the University of Kentucky, who served under Democratic presidents at the White House and the Justice Department.

He pointed to two incidents; the first being a ruling on June 27 in the legal fight over Trump's policy to limit birthright citizenship, where the Supreme Court curtailed the powers of federal judges in issuing "equitable" orders, which are court orders requiring one party to take action or refrain from taking action, rather than monetary compensation to resolve the case.

The second is a legal opinion written by Justice Neil Gorsuch earlier this year, which posited that reinstating high-level officials is not a matter suitable for the courts.

What legal basis might the case hinge upon?

The case could hinge on the reason or reasons that Trump presents. If the president chooses the path of "good cause," alleging that Powell mismanaged the renovation project of the Federal Reserve headquarters, the case might rest on the details of that project and who made the decisions that led to cost overruns.

Laws governing "good cause" typically define the term in three potential scenarios: incompetence; neglect of duty; and misconduct, which refers to wrongdoing while in office. There is no consensus on the precise meaning of these terms, which have emerged in Congress for over a century. The judge will need to determine, based on the arguments from both sides, whether Powell's role in the cost overruns of the renovation constitutes one of these three cases.

But clear legal precedents in this context are exceedingly rare. The U.S. Supreme Court has never considered whether a president has sufficient justification to dismiss an official for good cause.

Adam White, a scholar specializing in the Supreme Court and administrative state at the American Enterprise Institute, noted, "We have not tested this kind of law before, certainly not in the context of the Federal Reserve."

A report prepared by two professors at Columbia Law School, Jean Manes and Leif Minerd, noted that incompetence in this context is described as "wasteful government management by incompetent officials," while misconduct in office is viewed as "a wrongful act committed while performing the duty that caused harm to others." The report indicated that neglect of duty means "failing to perform tasks in a manner that caused harm to others."

It will be the courts' responsibility to determine how the "good cause" standard is applied in any lawsuit brought by Powell.

What is the issue with the Federal Reserve renovation project?

The Fed is currently undergoing its first major renovation of its two main buildings in Washington since their establishment in the 1930s. The central bank has stated that the project aims to reduce long-term costs by integrating its operations.

The Federal Reserve Board first approved renovation plans in 2017. Since then, costs have increased significantly. According to the bank's budget documents for 2025, the total estimated cost of the project has risen to $2.5 billion, compared to $1.9 billion in 2023.

The bank attributes the increase in estimates mainly to design changes resulting from consultations with review agencies, discrepancies between estimated and actual costs, and unforeseen circumstances such as discovering larger amounts of asbestos than anticipated (a mineral that was used in construction and insulation but found to be linked to serious diseases, banned in many countries, and its removal from old buildings requires special, costly procedures).

Several of Trump's allies have seized on the renovation project in a clear attempt to build a case justifying Powell's dismissal. Bill Bolte, head of the Federal Housing Finance Agency, claimed without providing details that Powell lied about project details during a Senate hearing on June 25. Bolte viewed this as grounds for dismissing Powell "for good cause" and called on Congress to open an investigation. A Federal Reserve official stated that Powell's statements were truthful.

Russell Vought, director of the Office of Management and Budget at the White House, in a social media post on July 10, stated that the renovation project represents a "flashy repair process."

Trump has stated that Powell should be subjected to an investigation regarding possible fraud related to the renovations.

At Powell's request, the Fed's Office of Inspector General has launched an investigation into the increases in the project's costs.

How long will it take to appoint a new permanent head if Powell is dismissed?

It will be necessary for Trump to nominate a new permanent chair, which will need to be confirmed by the Senate, a process that typically takes several weeks, if not months. In the meantime, the Federal Reserve Act states that the Vice Chair "shall act in the absence of the Chair."

What is the impact of Powell's dismissal on interest rate trajectories?

Dismissing the Federal Reserve Chair will not necessarily solve the fundamental issue Trump faces with the central bank. Trump wants to lower interest rates, but the new chair cannot achieve this alone. Interest rates are determined by the Federal Open Market Committee, currently chaired by Powell, and the committee has the authority to elect its chair. Traditionally, this position has been held by the Fed chair, but any of the 18 other committee members can assume it.

All 19 members participate in committee meetings, and 12 of them have voting rights. This means that the new chair will need to convince the other members with a compelling argument to lower interest rates.

How might financial markets respond to Powell's dismissal?

Investors value the Fed's status as an independent organization. Without this independence, the central bank's commitments to curb inflation lose credibility. Inflation expectations can also significantly alter financial asset prices.

Within 30 minutes of a Bloomberg report stating that Trump is likely to dismiss Powell, the S&P 500 index of U.S. stocks fell by 1%, the yield on 30-year U.S. Treasury bonds increased by 10 basis points, and the Bloomberg dollar index fell by 1.2%.

Anna Wong from Bloomberg Economics stated that if Trump indeed goes through with dismissing the Federal Reserve Chair, it would ultimately lead to a slowdown in economic growth, increased unemployment, and entrenched inflation.