The unprecedented pressure exerted by former U.S. President Donald Trump on Federal Reserve Chair Jerome Powell has ignited market tremors and widespread conjecture about the fallout should the embattled central bank chief be ousted. Such an action, lacking historical precedent in America, would inevitably trigger landmark litigation spanning Washington and Wall Street, ultimately requiring adjudication by the Supreme Court.
Recent turbulence on July 16 emerged following reports suggesting Trump's intention to take action against Powell, who has long drawn presidential ire for resisting interest rate cut demands. Trump swiftly denied these claims, stating Powell's removal remained "highly unlikely" unless tied to alleged "fraud"—a reference to cost overruns in the Fed's headquarters renovation. Trump and his allies are now scrutinizing this expenditure as potential "just cause" for dismissal under Section 10 of the Federal Reserve Act, which permits removal of board members for specific offenses. This raises novel judicial questions about whether budget mismanagement qualifies as legitimate grounds.
Should termination occur, Powell could immediately petition Washington's federal court for reinstatement via injunction. During proceedings, both parties would submit briefs examining whether the dismissal lacked substantiation. A judge would then determine injunction eligibility based on Powell's ability to demonstrate "irreparable harm" to himself and the Federal Reserve during litigation. This interim ruling proves critical since full case resolution might span months or longer.
If denied, Powell's removal would take immediate effect, elevating Vice Chair Philip Jefferson—a 2022 Biden appointee—as acting chair despite Powell's own 2017 nomination by Trump. If granted, Powell would retain his position pending litigation conclusion, with appeals potentially reaching the Supreme Court. The justices' injunction stance would likely signal the case's ultimate trajectory, as reversals of their preliminary rulings remain improbable.
The Supreme Court hinted in May that Trump couldn't arbitrarily remove Powell, distinguishing the Fed as a "uniquely structured quasi-private entity" when previously allowing unfettered dismissal of other agency heads. Nevertheless, the ruling preserved "just cause" removal possibilities, and Trump's favorable track record before the Court—including criminal immunity and policy victories—bolsters his position. Presidential power scholar Jed Shugerman observed, "They're clearing a path for Trump," though University of Kentucky professor Jonathan Shaub cautioned that even an illegal firing might not guarantee Powell's return, citing recent Court limitations on judicial reinstatement powers.
Legal arguments would center on Trump's justification. Alleging renovation mismanagement as "just cause" would require examining project details and accountability for budget deviations. Ambiguity surrounds the century-old statutory terms "inefficiency," "neglect of duty," and "malfeasance in office"—undefined phrases requiring judicial interpretation. Columbia Law experts note these historically imply administrative waste from incompetence, duty failures causing harm, or unlawful conduct during service. Adam White of the American Enterprise Institute emphasized, "These provisions remain judicially untested, especially within the Fed's context."
The renovation itself marks the first major overhaul of the Fed's 1930s-era Washington buildings. Officials contend consolidation will yield long-term savings, but approved costs ballooned from $1.9 billion in 2023 to $2.5 billion in 2025 projections. The Fed attributes increases to design alterations, cost-estimate variances, and unforeseen complications like asbestos discoveries.
Trump allies now weaponize these overruns. Federal Housing Finance Agency Director Bill Pulte accused Powell of false Senate testimony about project specifics (without providing evidence), deeming it "just cause" for congressional investigation—a charge Fed officials deny. White House budget chief Russell Vought labeled the renovation "wasteful extravagance," while Trump demanded fraud probes. At Powell's request, the Fed's inspector general has launched a cost-overrun investigation.
Powell's potential departure wouldn't automatically fulfill Trump's rate-cut wishes. The Federal Open Market Committee—chaired by Powell but comprising 18 members including 12 voters—sets rates. A successor would need to persuade colleagues toward looser policy.
Markets prize Fed independence; its erosion could undermine inflation-fighting credibility, destabilizing asset prices when inflation expectations rise. Within 30 minutes of Bloomberg's report about Powell's possible firing, the S&P 500 fell 1%, 30-year Treasury yields jumped 10 basis points, and the dollar index dropped 1.2%. Economist Anna Wong warned that ousting the Fed chair would ultimately trigger slower growth, higher unemployment, and persistent inflation.
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