Finance
Unraveling the legal, economic and market ramifications if Trump tries to fire Fed Chair Powell
U.S. Federal Reserve Chair, Jerome Powell and U.S. President Donald Trump.
Annabelle Gordon | Kevin Lamarque | Reuters
If President Donald Trump tries to fire Federal Reserve Chair Jerome Powell, it would almost certainly set off a courtroom battle that legal and policy experts say is bound to get messy, with uncertain impacts on the central bank, financial markets and the economy.
The tempestuous situation poses a myriad of thorny questions for which there are no easy answers considering no president ever has tried to unseat a Fed chair.
Among them:
- Does Trump have the authority to remove Powell? The answer is almost certainly no, not without meeting the legal threshold of “cause.” However, that raises additional questions over what would constitute cause, with growing suspicion in Washington and Wall Street that the president is using criticism over the Fed’s building expansion as a pretext to establish that condition.
- What happens next from a legal standpoint? Most people familiar with the situation say Powell would sue if Trump tries dumping him. The case likely would head to the Supreme Court, which ruled recently that the quasi-governmental Fed is a special entity immune from arbitrary personnel moves regarding governors. But that didn’t address the issues surrounding cause.
- Beyond a lawsuit, what else could Powell do? If he gets fired as chair of the Board of Governors, the Federal Open Market Committee, which is the Fed body that sets interest rates, simply could retain Powell as chair, giving him continued influence over monetary policy. The FOMC chair historically has been the Fed board chair, but that’s not a requirement.
- Does Trump really want to fire Powell, or is he simply setting him up as a scapegoat should the economy go south? The president has shown himself to be a shrewd and often times calculating political player, and having Powell around as a punching bag could be useful as crucial mid-term elections approach.
“What is extraordinary here is the president going back and forth and discussing loudly whether he might fire or try to fire the Fed chair,” said Bill English, the Fed’s former director of monetary affairs and now a Yale professor. “Of course, we’ve never gone through that, so we don’t know legally how that would work and how the courts would see that and so on. So, I think it’s all things that we haven’t seen before, and raises real uncertainties.”
A rapid about-face
Even by Trump’s standards, the event surrounding Powell of late have been stunning.
After an extended campaign of ad hominem attacks on Powell and demands for lower interest rates, Trump met with Republican congressional members Tuesday evening and asked them if he should fire the Fed chair, according to a senior administration official.
After the GOP members showed their backing for the move, the president indicated to them he would move on Powell “soon,” the official said.
However, no sooner did news break of the meeting then Trump told reporters that he’s not considering a move, saying it’s “highly unlikely” while simultaneously wondering out loud whether alleged mismanagement of the $2.5 billion expansion might qualify as cause.
Subsequent reports suggested that Trump’s lawyers indicated that he would have a hard time legally dismissing Powell. The Supreme Court’s ruling in Trump v. Wilcox this year called the Fed a “uniquely structured, quasi-private entity” whose governors enjoy insulation from removal for political or policy reasons.
That, of course, does not mean that Trump won’t try.
“It’s a very high bar legally, but there also haven’t been really any historical precedents for it,” Jonathan Kanter, former assistant attorney general during the Biden administration, said on CNBC. “So it would get litigated in court, probably be quite a bit of a circus, but, yeah, the standard is very high. It has to be for cause, and it has to be for neglect, malfeasance, abuse.”
The legal fallout
Powell’s options would entail suing and asking for a stay on any Trump removal action, Kanter said. The tactic itself that could push resolution past the expiration of the Fed chair’s term in May 2026.
As it winds through the legal system, the case would draw close attention and either could act as a bulwark for Fed independence, or reduce the normally sacrosanct central bank to just another political body subject to the whims of the Oval Office.
“The Supreme Court has signaled it would likely side with the Fed chair,” Kanter said. “It views the Fed as historically different than other independent agencies. Then it would kick the case right back down to a district court, which would determine whether the president had a basis to fire the Fed chair.”
Despite seemingly low chances of success, going after Powell still could serve a political purpose for Trump.
“I think Trump is setting it up so that there’s a sword of Damocles hanging over Powell’s head throughout the rest of his tenure,” Kanter said. “If there is a sustained period of inflation or stagflation, Trump has the ability to say, well, it’s this guy’s fault because he didn’t lower interest rates.”
Indeed, the Trump-Powell dispute by all appearances runs deeper than qualms over the building renovations.
Quest for rate cuts
Trump wants sharply lower interest rates, and he wants them now, economic consequences be damned.
The president was on the attack again Friday, railing against Powell and his fellow central bankers. In a Truth Social post, Trump charged Powell and the FOMC officials are “choking out the housing market with their high rate, making it difficult for people, especially the young, to buy a house. He is truly one of my worst appointments.”
Up until recently, Trump has reserved most of his criticism for Powell individually. But on Friday, he also said, “the Fed Board has done nothing to stop this ‘numbskull’ from hurting so many people. In many ways the Board is equally to blame!” Finally, using his nickname for Powell, he said, “I can’t tell you how dumb Too Late is – So bad for our Country!”
Besides Powell, Trump has two appointees on the board dating back to his first term: governors Michelle Bowman and Christopher Waller, both of whom have said they are leaning toward a rate cut when the FOMC meets at the end of July.
Beyond those two, though, other members have not expressed any appetite for easing before the September meeting. There are 12 voters on the FOMC, and the chair is just one of them. Fed watchers including English, who served as the FOMC secretary, see policymakers pushed into a corner where cutting in July would seem like acquiescing to Trump’s demands.
That’s part of a larger concern on Wall Street over the reputational fallout the Fed faces as the Trump White House ramps up its efforts to use politics to influence monetary policy.
Market, economic fallout
“The experience of other countries in which governments have suppressed central bank independence has generally been a combination of a slippery slope and the occasional sudden drop,” Jonas Goltermann, deputy chief markets economists at Capital Economics, said in a recent note. “Unlike raising tariffs, which can be withdrawn before the real damage is done, the reputational costs from firing Powell would be harder to undo.”
Then there are the market and economic issues.
Firing Powell would be unlikely to change the committee’s approach to monetary policy, and in fact could harden its position on rates.
Even if the FOMC did cut, it could do more harm than good to Trump’s goal of lowering finance costs on the national debt. The last time the Fed cut, in the final four months of 2024, Treasury yields rose almost in perfect reverse correlation to the rate reductions, and the same thing could happen again if markets perceive the Fed is surrendering its inflation-fighting credentials to placate Trump.
“The historical record suggests that political interference contributed to poor monetary policy in the late ’60s and early ’70s, with unfavorable consequences for inflation developments,” JPMorgan Chase chief U.S. economist Michael Feroli wrote. “Any reduction in the independence of the Fed would likely add upside risks to an inflation outlook that is already subject to upward pressures from tariffs and somewhat elevated inflation expectations.”
While Trump wants the Fed to slash its key borrowing rate by 3 percentage points, such a move could raise inflation expectations, causing fixed income investors to demand higher yields, “thereby increasing longer-term interest rates, weighing on the outlook for economic activity, and worsening the fiscal position,” Feroli added.
For the time being, Powell and Co. is expected to continue to conduct business and make decisions based on data, with the constant drumbeat of Trump serving as a distraction that doesn’t seem like it will go away, even if the president ultimately never tries to fire the Fed chief.
“Well, it isn’t helpful to have the president be so aggressively antagonistic trying to pressure the Fed. It’s not unprecedented that a president has views on monetary policy. We’ve seen that over time. But I think what’s different about this time is that it’s been pretty persistent and unrelenting,” former Cleveland Fed President Loretta Mester said Friday on CNBC. “That will not change how the Fed makes it goes about making its decisions on monetary policy.”
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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