Trump Won’t Rule Out Firing Powell, but Says It’s ‘Highly Unlikely.’ Some Believe the Damage May Be Done.

Fed Chair Jerome Powell’s term at the head of the central bank ends next May. (BRENDAN SMIALOWSKI/AFP via Getty Images)

President Donald Trump threatened on Wednesday to fire Federal Reserve Chair Jerome Powell and then backtracked within minutes, creating fresh uncertainty about the future of U.S. monetary policy and reviving concerns over political meddling in the central bank.

“I don’t rule anything out, but I think it’s highly unlikely, unless he has to leave for fraud,” Trump told reporters in the Oval Office, hinting at possible misconduct tied to the Fed’s $2.5 billion headquarters renovation. “It’s possible there’s fraud involved,” he added. “He’s a terrible Fed chief. I was surprised he was appointed.”

Trump nominated Powell as chairman of the Fed during his first term. But in a move that has drawn increasing ire from Trump, Powell has kept interest rates steady at 4.24%-4.50% since December, citing uncertainty about the president’s own tariff policy and inflation. Powell has said he intends to serve his full term as Fed chair, which ends in May 2026.

Trump’s remarks came after a senior White House official told Barron’s that the president was likely to fire Powell soon. That news sent bond yields higher and briefly pulled stock indexes lower before Trump softened his stance.

The news follows a letter sent last week to Powell from Office of Management and Budget Director Russell Vought, criticizing cost overruns for the headquarters renovation and accusing Powell of misleading Congress. The Federal Reserve has denied those allegations and published additional information on the project in response.

Market reaction to Trump potentially firing Powell was swift on Wednesday morning. “You literally fell off a cliff,” said RSM chief economist Joe Brusuelas.

Jared Bernstein, former chair of the Council of Economic Advisers, called firing Powell “a recipe for disaster,” noting that the kind of steep interest rate cuts Trump is demanding would likely be highly inflationary and out of step with the Fed’s dual mandate of price stability and maximum employment. “One thing I’d worry a lot about is the de-anchoring of inflationary expectations,” he said.

Thierry Wizman, global interest rate strategist at Macquarie, said the market reaction to the threat was textbook. He pointed to a steepening yield curve, with short-term rates falling on expectations of easier policy and long-term rates rising on concerns about inflation and deficit financing. Wizman said the Trump administration appears to be using fiscal goals to drive both trade and monetary policy decisions.

Wizman added that Powell’s political support in Congress is eroding quickly on both sides of the aisle. “Powell presented himself as nonpartisan, and I guess people just don’t like people who are nonpartisan, they want people to take sides,” he said.

Andy Levin, a professor of economics at Dartmouth College and a longtime advisor to many central banks, said that Congress has delegated its constitutional duty to regulate the value of money to the Fed, and that it retains the authority to remove top officials “for cause.” That standard, he said, includes inefficiency and malfeasance. Republican leaders now appear to believe Powell’s actions around the headquarters renovation could meet that threshold.

Progressive lawmakers have also expressed concerns, though for different reasons. “If Trump were serious about lowering interest rates, he would rein in his chaotic tariffs,” said Sen. Elizabeth Warren, ranking member of the Senate Banking Committee, in a statement. “Independence does not mean impunity and I have long pushed for more transparency and accountability at the Fed. But give me a break…Nobody is fooled by this pretext to fire Chair Powell. And markets will tank if he does.”

Despite Trump’s walk-back, some believe the damage may be done. “This was a preview of coming attractions,” said Brusuelas. Markets now know that firing Powell is a live possibility, and that introduces instability.

Wizman warned that weakening the Fed’s independence would eventually undermine global trust in U.S. financial institutions. “It may damage confidence in both the dollar and long-term Treasury securities,” he said.

Two major bank CEOs, JPMorgan Chase’s Jamie Dimon and Goldman Sachs’ David Solomon, have indicated that they don’t support the removal of Powell. Solomon told CNBC Wednesday that central bank independence “has served us very well” in terms of monetary policy.

The Federal Reserve declined to comment for this article.

Powell has repeatedly said he intends to serve out his term. If he were fired, the legal and political fallout could be significant. “Does he get escorted out of the building with his belongings in a cardboard box?” Bernstein asked. Powell could, he said, remain on the Board of Governors for the next few years. “That would be a preferable outcome to the cardboard box scenario,” he said.

Write to Anita Hamilton at anita.hamilton@barrons.com and Nicole Goodkind at nicole.goodkind@barrons.com.